Building an emergency fund and learning how to save money is essential in order to safeguard yourself and your family in the future financially. Sudden crises and other unexpected scenarios may otherwise deplete your savings and investments in case you are not prepared. This is where the creation of an emergency fund becomes highly necessary, to say the least.
Knowing More About An Emergency Fund
The concept of an emergency fund is all about knowing how to save money. Think of it like a contingency or rainy day fund that will help you put up the money to meet sudden needs like household repairs, medical emergencies, job losses, pay cuts, and so on. This is one of the first investment decisions that you should execute in your working life, and it will help you avoid high-interest debt and credit cards to meet unforeseen expenses. At the same time, you will not have to mortgage any of your assets or take loans for these purposes.
Things to Know About Building Your Emergency Fund
Here are some key aspects worth knowing about the process of building an emergency fund.
- The fund size will naturally be dependent on various factors, including your lifestyle, income, and dependents, along with your existing debts.
- The usual thumb rule is to have 3-6 months of your basic household costs or annual income as your emergency fund.
- In case you have a family with children and are the sole breadwinner, then the emergency fund amount should cover your costs for a minimum of one year.
- Work out your necessary expenses and other costs, inclusive of mortgage/loan payments, maintenance or rent, insurance premiums, food, staff salaries, school/college fees, any other debts, electricity, and so on. Also, add utility bills, phone bills, travel, medicines, groceries, and more.
- You can leave out non-essential costs like gym memberships, entertainment and recreational costs, clothing, lifestyle expenditures, dining out, etc.
For example, if your essential monthly expenditure works out to around Rs. 50,000, then you should have at least Rs. 3.6-6 lakh as your emergency fund.
Tips on Creating an Emergency Fund
How to save money to create your emergency fund? Here are some tips worth noting in this regard.
- You should first set monthly savings targets for this fund. Keep putting away some money every month until you achieve your target.
- Keep this money in a separate account, and do not spend this money by all means. You can consider putting it in short-term investments that have higher liquidity.
- Whenever you get a lump sum amount or bonus, put it into your emergency fund after keeping aside an amount to indulge/enjoy yourself.
- Keep at least 15-20% of this amount in cash, which you can quickly withdraw, while another 20% could be in the form of bank deposits that will earn some interest. The remainder can be invested in short-term investments or deposits with minimal/negligible risk levels.
Boost Your Financial Security with An Emergency Fund
Keep saving consistently and build up an emergency fund that ensures your financial security without any hassles. This will keep you ready to not only meet unforeseen expenses but tackle several situations in life without worrying about the financial implications of the same or depleting your existing funds and other assets.
