How to Build An Emergency Fund?

The way seatbelts protect you during accidents, an emergency fund protects you during unforeseen times like loss of job, medical emergencies, or unexpected expenses. 

What is An Emergency Fund?  

An emergency loan is money that you should put aside to cover at least 3-6 months of your monthly living expenses. It’s like a safety net which you can always fall back on. 

The Importance of an Emergency Fund

Now that you know what is an emergency fund, the next step is to understand why it is important. Since life is full of surprises and unexpected events it’s extremely important to stay prepared with additional funds.

Whether it’s a sudden job loss, medical emergency or even an unforeseen event, having some extra cash handy can reduce the burden of that situation. With an emergency fund, you’re able to meet your basic needs until you figure out the next steps.

How much should your Emergency Fund have?

Depending on your monthly income and expenses, typically, your emergency funds should be able to meet 3-6 months of your expenditure. For example; if your monthly income is Rs. 30,000 then your emergency fund should be anywhere between Rs. 90,000 to Rs. 1,80,000.

Here are 2 Types of An Emergency Fund:

Long-Term Emergency Fund

A long-term loan for emergencies can help you meet expenses for an extended period in case of any unfortunate circumstances. This can include job loss, natural calamities, medical treatments, etc.

Short-Term Emergency Fund

A short-term loan for emergencies can provide you with financial support for situations that are more short-lived and require immediate attention. This can include a sudden car repair, accident, etc.

How to Create Emergency Fund?  

Your future self will thank you for starting early. Start building your emergency fund today in these 5 simple steps!  

1. Evaluate How Much Money You Would Need

Since an emergency fund is roughly 3-6 months of your living expenses, it is important to understand how much you’re spending monthly on essential items like your rent, groceries, and utility bills.   

For example, if you’re currently spending ₹25,000 each month, the best practice is to build an emergency fund of ₹75,000 or more.

Also, doing this activity will give you an insight into your spending habits. And it is a great opportunity for you to cut down on your excessive spending.

2. Choose Where You Save Money

After deciding the total amount of money you need to build your emergency fund, it’s time to decide where you save this money. The best practice is to choose an investment that is stable, easily accessible, has high returns, and is safe from market fluctuations.  

Usually, people open a savings account with less fees and a good interest rate. You can also explore some other investment options like short-term fixed deposits and liquid mutual fund.

3. Set a Target for Yourself

Setting a target amount and date by which you want to build your emergency fund will help you speed up the process.  

When setting the target, consider factors like your monthly income, expenses, and savings.  

The earlier you start, the more time you will have to achieve your target. This could take 3 months, 6 months or even a year based on your goal.

4. Start Saving Every Month

Put aside a fixed amount of your total income towards your emergency fund and do this every month.  

For example, if you have to save an amount of Rs 3 lakhs and have given yourself a target of 9 months, start putting aside Rs 33,000 every month.  

This will help you reach your target on time.  

5. Create a Separate Bank Account

Creating a separate savings account which is only dedicated to your emergency fund is one way of controlling the urge to spend that extra money.

You can go a step further and set up an auto-debit feature on your primary account. This will make sure you are putting money into your emergency fund, every month.

The best practice is to set the auto-debit date close to the day you receive your income, helping you avoid any kind of overspending.   

How to Save for an Emergency Fund?

When creating your financial plan, building an emergency fund should be on top of your list. It doesn’t only act as a safety net during emergencies but also provides you with peace of mind. Here are simple steps in which you can save for an emergency fund:

Set a goal: Calculate your total income and expenses to understand the total amount that you need to save for building an emergency fund. 

Create a budget: Based on your goal, make sure you create an efficient budget that includes savings for your emergency fund

Cut down expenses on non-essential items: Until you have built your emergency fund, make sure you reduce any unnecessary expenses. This can open up more savings towards your emergency fund.

Automate your savings: If you’re finding it too difficult to save, automating it is one of the easiest and most effective ways. 

How To Secure Your Emergency Fund?

While it’s important to build an emergency fund, it’s even more important to ensure it’s secure and accessible.

Here are some simple ways in which you can secure it: 

Savings account:  Where to keep emergency funds in India? A savings account that’s liquid and secure is the best place to invest emergency funds. 

Avoid Risky Investments: An emergency fund is supposed to be easily accessible during an emergency. Hence it’s best to avoid risky investments like stocks or mutual funds. 

Keep monitoring your fund: Regularly checking your emergency fund can help you ensure that it’s intact during your time of need. 

Don’t touch that fund: Make sure you set strict rules for withdrawing that money and keep it only for emergencies. 

Replenish Funds: After you have utilised your funds, make sure you replenish it. It’s important to keep updating and renewing your emergency fund so that you always have instant access to funds. 

In Conclusion 

Do you think using an emergency fund for an emergency Goa trip sounds like a wise decision? Don’t ever make that mistake. 

An emergency fund is only supposed to be used in the times of crisis and should be used only when you really need to.

Also Read: Instant Loan Online without Collateral up to ₹5 Lakhs