emergency fund
Also called: emergency fund
Savings set aside specifically for unexpected costs, kept separate from the daily account.
What it means
An emergency fund is money set aside specifically to face unexpected events, such as illness, loss of income, or home damage. This fund is kept somewhere easily accessible and separate from daily spending money. The commonly used measure is several months of family expenses, not several months of income. In Indonesia, emergency funds are usually kept in a separate savings account.
Why it matters for families
An emergency fund prevents families from going into debt when misfortune strikes. Without this fund, one hospital bill or one month without income could force borrowing at high interest. As a result, monthly burdens rise and financial recovery takes longer. An emergency fund also provides peace of mind so financial decisions are not made in a state of panic.
Example
For example, family expenses are Rp6 million per month and the emergency fund target is four months, meaning Rp24 million. The family sets aside Rp1 million each month into a separate account. After two years, about Rp24 million is collected, and that money is not used for daily spending.
Common misunderstanding
It is often thought that an emergency fund is the same as ordinary savings. The correction is that ordinary savings may be used for plans, while an emergency fund is only for urgent situations.