How to build an Emergency Fund and Why it matters? A step by step guide

How to build an Emergency Fund? Why there is a need of it? Be ready for all the emergencies by building a solid emergency fund.

0
36
build an Emergency Fund
Image Source: Pixabay.com

We’ve learned from this pandemic outbreak that emergencies can happen at any time, and the only thing we can do is be ready and prepared for them. Emergencies, including natural disasters like earthquakes, floods, health conditions that force you to miss work, and economic downturns that cause job losses and salary cuts, aren’t in your control, but ensuring you have enough funds to cope is. How do you cope with such a difficult situation and meet your essential expenses? To get through the rough times, you need to build an emergency fund. 

What is an emergency fund?

Having a contingency fund, as its name implies, helps you and your family to weather medical emergencies, unexpected household repairs, job loss or job cut, or something that impacts the global community such as wars, social unrest, or pandemics, like the current one.

An adult-sized financial plan should begin with such a decision to ensure you remain afloat without having to turn to additional debt, whether through credit cards, high-interest loans, or mortgaged assets. It helps you to avoid taking on additional financial burdens without knowing how you will repay them.

Is there a need for an Emergency Fund?

Money is essential to give one a financial buffer during an emergency in life. To avoid any further debt or relying on credit cards or borrowing money from others, we always need an emergency fund. The emergency fund portfolio should be more weighted if you are already in debt. You cannot always borrow money from your friends and family or take a loan when you lose your job, move your home, or need any medical care. It is better to start saving some money from the very beginning of your career. An emergency fund will surely save you from further debt if you ever experience a financial crisis. That is why we all need a financial buffer in the form of an emergency fund to be prepared for any emergencies. 

A guide to emergency fund saving?

Planning your finances begins with a budget. Three main steps should be followed when you are just starting to accumulate an emergency fund. 

  • Calculate your monthly household expenses and categorize them into mandatory and discretionary spending. 
  • Get an average figure for your obligatory expenses by tracking them for a few months. 
  • In addition to assessing your expenses, you can also weed out unnecessary spending by performing this exercise. 

It is impossible to predict how long an emergency will last, so build an Emergency Fund that can help you maintain your lifestyle for at least 3-6 months is ideal. 

Let’s say that the expenses for your household total INR 50,000 every month. Therefore, you should maintain an emergency fund that contains anywhere from 1.5 lakhs to 3 lakhs at any given time. You may have different expenses depending on the number of earning members in your household, the number of dependents, and your expenses. 

You might want to consider saving more money if you have parents who depend on you and children who are in school. The number of savings would increase by two-thirds if you included the monthly repayments of both loans and your household expenses.  

One of the common recommendations aimed at single-income families is to develop a larger emergency fund. This fund should be able to cover the fixed expenses of a household (rent, installments) for one year and cover the variable expenses for six months. 

In the case of a family with two earners, savings per person may be lower. 

What is the best way to build an emergency fund?

Setting aside a few lakhs might seem like an impossible task, but with a little planning and financial prudence, you can easily do it. The following tips will help you get started:

1. Establish a monthly goal: After you determine the amount that suits you best, stagger deposits into smaller, manageable amounts each month. By doing this, you get into the habit of saving and the task seems less daunting.

2. Maintain a separate account: The money should be parked out of sight, out of mind so that you do not get tempted to spend it. If possible, invest in short-term debt funds, such as liquid mutual funds. More on that later.

3. Automate: When you receive your salary or income from your business, save a small amount immediately whenever you receive it so that you can pay yourself first. Just as you would save for retirement or a down payment on a home, so you should do the same for your future self. Make sure to automate your transfers to save as much money as possible.

4. Cut your expenses: Restricting your spending on non-essential costs allows you to save more quickly and possibly even increase your monthly allowance. You don’t have to go completely cold turkey, but you should prioritize your expenses. Eat out less frequently, watch movies at home, limit nonfluid online shopping, etc. Instead of eating out weekly, pick out one or two outings a month.

5. Put lumpsum receivables to work: Have you received a bonus at work, received a tax refund, or received an envelope from an aunt for your birthday? A small portion of your spending should go to your emergency fund, and the rest should go to enjoying yourself. You can accelerate your goals by adding any windfall gains.

Conclusion

Last but not least, an emergency can strike at any time, anywhere. Thus, we don’t know when we’ll need an to build an Emergency Fund. Keep an eye on your extra expenses and keep saving money for emergencies and the future. Don’t spend money unless it’s necessary. Buying unnecessary things and shopping will only waste your money. Cut down extra expenses to adjust the lifestyle. You cannot judge the value of money by how you use it, but by the way, you use it!! You can prepare yourself against financial setbacks by having an emergency fund in times of crisis. Your need for an emergency fund will fluctuate, just like any other financial goal. In short, your emergency fund needs to increase proportionately to your family size or lifestyle changes. Last but not least, you should only use the money when you really need it.

Also Read: 10 Best Mutual Funds to Invest in 2021

LEAVE A REPLY

Please enter your comment!
Please enter your name here