Emergency Fund First or Insurance First?

Emergency fund first or insurance first? This question is one of the frequently asked questions to Alviko Ibnugroho, Daya.id Financial Planner. Perhaps this question seems simple, but in reality it will be difficult to decide on preparing an emergency fund in advance or insurance?

Functionally, emergency funds and insurance have similarities, especially for those of you who are married, namely as 'protection' from emergency conditions that are a burden on yourself and your family. An emergency fund can be likened to a 'spare tire' in life. For example, you experience an emergency situation such as an accident, entering the hospital, or for other urgent living needs.

Meanwhile, insurance serves to replace funds lost when you are hit by a disaster. For more details, let's discuss more deeply related to emergency funds and insurance.

Knowing the Importance of an Emergency Fund

Why the heck do you have to have an emergency fund? What is the importance of an emergency fund? To answer these questions, here are some of the benefits of having an emergency fund.

1. Make it Easier for You

You don't need to be confused about finding a large amount of cash in case of emergency conditions, for example, accidents, hospital admissions, and others.

2. Not Losing Momentum

If there are necessary conditions to make an important and urgent decision, then an emergency fund can be a way out. Such as when you get a rare offer or opportunity that requires a certain amount of funds in a short time, for example, a property offer at a very attractive price and limited units. That's when you can use your emergency fund to seize the opportunity.

3. Your Investment Funds Will Not Be Eroded

Your investment funds will not be eroded, why is that? Because when your investment decreases in value, you can top up the investment instrument.

4. Can Be Used as a Backup

An emergency fund can be used as a reserve to anticipate losses so that there is no need to mortgage anything or find a loan which of course will be charged administrative costs and interest.

5. Life Becomes Calmer

An emergency fund can make your life calmer and more secure. As explained above, that emergency fund is like a 'spare tire' in your life.

Difference between Emergency Fund and Insurance

The difference between an emergency fund and insurance lies in the liquidity and sum insured earned.

1. Liquidity

One of the advantages of an emergency fund is that the fund can be used as a savings account that you can save yourself at any bank, so that you can withdraw the money at any time (liquid). Meanwhile, insurance products are paid to the company and managed by the company and can only be withdrawn when an incident occurs (illiquid).

Seeing this, the emergency fund is of more general interest where he can be used for various types of risks. Unlike insurance which usually only provides protection on specific risks.

2. Sum Insured Earned

Insurance has an advantage in the amount of sum insured money earned. For example, you buy critical illness insurance or life insurance with premiums starting from IDR 1 million per month at the age of 30. If at the age of 50, you experience a risk of heart attack, stroke, or cancer, then you will get a coverage fee of IDR 500 million. Only by paying premiums for 20 years, the total of which is not even up to IDR 500 million.

Based on this, insurance is indeed more profitable than an emergency fund. Meanwhile, if you only have an emergency fund, you may not be able to get coverage costs of up to IDR 500 million. Even if there is an equal opportunity, the funds you have to set aside a month are definitely more than the premiums that must be paid on insurance.

Emergency Fund VS Investment, Which One Is More Important?

By looking at the differences above, insurance and emergency funds are actually complementary. When one aspect has been achieved, then the other must also be owned. An emergency fund can be very helpful in various financial risks in a faster timeframe, but the nominal is not too much. Meanwhile, insurance will cover financial risks more than the nominal side. This is why both are penitng.

But if income is still limited, then which one should be prioritized first, an emergency fund or insurance? The answer is that insurance can help you deal with severe financial risks, such as expensive health or education costs. But an emergency fund can help you cover more financial risks that may be less burdensome, such as losing your job or repairing a home due to a leaky precariousness, or if there are urgent conditions in your life.

When is the Best Time to Have Insurance?

The best time to have insurance for either life insurance or health insurance is as early as possible. Because in addition to being able to provide protection earlier, the insurance premiums to be paid are relatively smaller. But for those of you who are already older, it is also never too late to have insurance.

Whereas in having life insurance, you are advised to have it when you have earned and have dependents in the family.

The point is that by having an emergency fund and insurance, you will become better prepared to go through the day ahead with various possible types of risks to come. Don't let your dreams be ruined because you don't have an emergency fund and insurance!

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