Emergency Funds FAQs

EMERGENCY FUNDS: FAQs

Why do I need emergency funds?

In case of emergencies, you want to be prepared with savings that you can use to cover these unexpected bills. This helps you prevent financial shocks that could affect your usual lifestyle. It is also one of the steps towards financial independence as it gives you the room to rebound from small shocks without having to rely on other people or by going into debt. 

How much do I need?

You usually need a minimum of 3 months' salary.  

But to properly determine this, you need to answer the following questions:

- How much do you spend a month? If you are a household where multiple people contribute their income and your salary alone will not be enough, you need to make sure you save enough to cover 3 months of expenditure.

- Do you or your dependents have any medical issues? If yes, and if these are not monthly expenses (and therefore not factored into the previous step), you need to also save up to cover those medical bills. But remember, you can also claim medical insurance from Aasandha for a wide variety of medical treatments, or you can get a more comprehensive medical insurance coverage to help you cope with these costs. 

- Are your main necessities in good condition or insured? For example, your motorcycle and your house. If they aren't, you may need a higher amount to help you cover the cost of any repairs or replacements that they may need. 

How can I save up for an emergency fund?

One great way to save up is to make a specific savings account just for emergencies. Then you can set up automatic monthly deductions from your bank account and set it to be transferred there. You can also employ other creative saving tips to help you save. But most of all, you need to know that you are saving for a very important reason, and you need to just make sure you cut out unnecessary expenses till you meet that goal. 

Aren't emergency funds and insurance for the same thing?

While they can both help you deal with deal unexpected expenses, your emergency funds and insurance are not substitutes for each other. You need both of them. Insurance is meant to cover potential shocks. You pay a certain amount regularly for a specific type of insurance, and if you are faced with a shock that fits their terms and conditions, the company covers a majority of costs associated with that. 

Emergency funds are just funds that you accumulate and keep aside in case you need money suddenly.

For example, medical insurance can cover medical bills and medicine. Maldivians have free medical insurance under Aasandha, and it covers certain consultations, tests, and treatments. However, if you need to cover the costs of bills that it does not cover, you would have to rely on your emergency funds.

But there are also times when you face shocks that you cannot insure or claim insurance for. If you break your phone for example, you would need money to replace it. Here, you still need your emergency funds. 

On the other hand, there are certain emergencies that you cannot simply save for because they would require enormous savings and are hopefully unlikely events - your death for example. In this case, life insurance is more suitable. It is a guarantee that if you pass from an untimely death, your dependents will be given some sort of payment to help them get back on their feet. The amount depends on the type of insurance you choose.

To be well-prepared for unexpected situations, you need both.