There is a possibility that you may be in the need of an emergency fund in many situations in life. As the term implies that emergency circumstances occur unexpectedly without notice and that they require rapid response.
A brief impairment might reduce one’s earning capacity for a few months, or there could be a long-term job loss that lasts for several months after the impairment.
There is always the possibility that a medical emergency may occur during the processing of a claim or during a period of waiting for a diagnosis.
It may be necessary to borrow money in this type of situation in order to tide over the expenses. There is no denying the fact that financial outflows are inevitable, whether it’s paying home bills for a longer period of time or keeping up with loan EMIs.
After witnessing the post-pandemic scenario, we have also come to appreciate the significant importance of emergency funds to a great extent as well. There is a great deal of need for each and every one of us to be aware of this concept.
How much Emergency Fund will you need?
In the opinion of many people, it is a good idea to have an emergency fund worth at least two months of expenses. In spite of this, many financial experts deny this truth and recommend saving enough money to cover your expenses for three to six months in advance.
In order to begin, one must first determine as accurately as possible what the person’s monthly expenses will be.
When you add up all of the expenses, you may end up with a number that is far beyond what you expected. You will definitely be surprised by this number, but there is a lot more to the story than that.
What is the Reason for Saving This Much?
It’s clear that you don’t have much money on hand, and every expense of yours requires money to be paid. No sensible investor would hesitate at the prospect of putting away a significant amount of money in an emergency funds envelope.
Six months’ worth of costs is nothing compared to the amount you’ll need to save for retirement.
Where to Hold the Emergency Savings?
When it comes to planning to save, one of the most important things one must consider before starting is this question. For better management of the funds, it is recommended that half of the necessary funds be kept in a savings account or a flow fixed deposit, and the other half should be kept in short-term and liquid mutual funds.
There are many ways to invest in liquid mutual funds, such as treasury bills, commercial paper, and money market funds, which invest in debt products with short maturities.
Consequently, this has resulted in a more constant and less erratic stream of returns. It is their goal to protect their money, keep it liquid, and earn a reasonable tax-efficient return after holding it for three years.
How to Build An Emergency Fund?
There are so many ways to build your emergency fund. But you need to be safe and have strong determination while making an emergency corpus for you and your family. Here are some tips that you may follow to create it:
- You must Set a date and target amount to establish as your emergency fund. An emergency fund can be long-term and short-term (you should save both).
- You should save some percentage of your income every month. It will help you create a big amount easily.
- Open a separate account for the emergency funds and deal with it carefully to manage your fund.
- Be committed and do not spend this money on your entertainment and other luxuries. You need to have full control so that you won’t regret it in the last.
- Save a small amount but be consistent. Saving a big amount but not being consistent may not work. So be regular to save money.
- You should have a habit of saving money. Creating an emergency fund will be easy for you.
- An emergency fund is useful in many sudden emergencies like medical emergencies, job loss, unexpected situations, etc
- Your emergency fund should be at least equal to six monthly income. However, you must go for the maximum money that you can save.
- How much emergency fund you should save totally depends on your monthly income/expenses/goals. However, you must consider some unexpected emergencies like medical, job loss, etc.
- You should not invest your emergency fund in a high-risk portfolio, because you may lose your money if the market is not in your favor. So it is always advisable to keep your fund safe.
Let’s discuss some of the important ways to in detail.
1- Investing in Liquid Funds Through SIPs
Despite the fact that a savings bank account may be the first thing that comes to mind after hearing about the asset’s accessibility and safety, it is not the most suitable solution for securing it.
The reason for that is that you’re going to be tempted to use it every time you need money in the future. On top of this, you will also receive a minimum amount of interest on this money.
In light of all of these factors, liquid funds prove to be one of the best approaches for developing an emergency reserve. It is a type of debt fund whereby corporations are lent money for a short period of time, and they earn interest from the borrower.
Consequently, liquid funds are a low-risk investment while at the same time providing the opportunity to earn up to 50% higher rates than savings accounts while still posing little risk to the investor.
2- Put Away Every Extra Rupee That You Have
It is not recommended to use this strategy if you are in your 40s or 50s and do not have an emergency fund. Set a deadline for yourself for when you plan to begin saving money for an emergency fund as soon as possible.
Decide the amount of money you think you will need to save. Make sure all of your spendings is kept to a bare minimum and that you save every extra rupee you have for this emergency fund.
The most critical thing is to keep an eye on your emergency fund on a regular basis, regardless of what method you choose, and to replenish it if it has been depleted from time to time.
By doing this, you will make sure that you are prepared financially for any emergency situations that may arise.
3- Having a Savings Account with a Sweep-in Facility
It can be considered to be one of the best ways to navigate your funds from your savings account into emergency funds automatically in times of need.
You simply need to set a maximum amount over and above what you want to use in your account and consider a sweep-in facility in order to do that. So once your money reaches the limit you have set, it will automatically be moved to a fixed deposit.
But if you ever need the money, you can withdraw the money at any time without restrictions or limitations. Putting your fund into this type of account will make sure that it will earn something more than a saving account.
Is it better to pay off your debt first, then save up an emergency fund?
This can be viewed as both a benefit and a disadvantage. Since paying off high-interest debt can be such a financial headache, it is usually best to deal with it first. If you pay off your high-interest loans, you can be burden free.
However, it is highly recommended that you develop an excellent financial habit of contributing even a small amount to an emergency fund while paying off high-interest debt.
You just need to maintain a good balance and have the best financial management. So that you can clear off your loan and able to save good funds also.
You must make a monthly budget in every month and should implement it in the best way. A monthly budget can be very helpful for you.
There is no way to predict when an emergency may strike, which causes most individuals to be concerned about how they will manage their funds during that time.
According to most experts, it is recommended that you keep three to six months’ worth of living costs in an emergency fund. When you face a difficult situation, it is you who will be able to help you get through it.
The total amount may vary from person to person. As you know that every person is not the same and each one has their own earning sources. Some people are self-employed and some are salaried.
Some people are earning very high income and some are earning a little. However, An emergency fund is important for everyone and everyone should save some money for unexpected sudden emergencies.