Building an emergency fund is very important but really challenging for many. After all, unexpected expenses medical emergencies, car repairs, or loss of one’s job—can break anybody without the latest застібка Đức financial cushion.
The platform to address this problem involves personal finance strategies focused on saving and planning. Many financial advisors recommend that a person reserve three to six months’ worth of living expenses in a dedicated emergency fund, which would act as a shock absorber against any sudden hiccups in the financial life and bring peace of mind and financial security.
Well, this solution first begins with budgeting and then prioritizing the act of saving. In other words, having achievable goals related to savings and automating a contribution towards the emergency fund will, over time, be very helpful. This also prevents the misuse of this fund for any other emergency other than what it is created for by not commingling it with everyday accounts.
Putting one’s plan for an emergency fund together requires discipline and commitment; at the same time, it is an important insurance measure. If people are more prepared to absorb unexpected shocks, they will be more resilient when a financial onset hits them.
There were so many challenges brought forth by the pandemic in 2020. Work and school suddenly turned online, so I suddenly had to improve our home IT setup—starting from purchasing two laptops to a printer, a router, and a strengthened broadband connection, things in low supply and at high prices because of the crisis over supply chain disruptions. We could not do anything but spend substantially on it.
Within a few weeks, both of my parents fell prey to COVID-19. In that panic of the first wave, a hospital bed was close to impossible to find. Thankfully, we got beds, but treatment costs ran into lakhs per person. I wasn’t sure whether all this expenditure would be covered by insurance. From nowhere, I had to spend so much money in such a short time.
That really did put the emergency fund into perspective. While we can’t control emergencies, we can our preparedness towards them. An emergency fund means you are not running helter-skelter for money during a crisis, which can pretty much be less stressful. Really, it reduces the stress level by letting one focus on the situation and not mix it with financial worries.
How to Build an Emergency Fund
The three steps of building an emergency fund involve determining the amount one needs, accumulating such an amount, and finally, deciding where one should keep the money.
Step 1: Estimate What You Need
The first thing to do is figure out how big your emergency fund should be. Some experts say you should have at least enough money saved to pay six months’ worth of expenses. However, it can really vary from family to family because of their differences. You will have to talk to your family and decide on a number that will make you feel comfortable. For certain people, this may be six months of expenses; for some others, it could be ten or fifteen months. For the purpose of this conversation, assume you want to save ten months of expenses, or about ₹5 lakhs.
Step 2: Building This Corpus
The next step would be to work out how one is to save this amount. The most one usually does is just takes a bit each month until one reaches the target amount. Or, if one is fortunate enough to have a lump sum lying around, then one simply locks it away for a rainy day. You can build this emergency fund by consistently saving over some months.
Step 3: Where to Save the Emergency Fund
After saving for the emergency fund, the question comes to mind about where to keep it. It becomes very important to invest in financial products with low volatility so that you can have the money in its entirety when required. Do not invest your emergency fund in stocks or equity mutual funds as these fluctuate in value and may not be easily available when a crisis strikes.
Now, the risks can be low in the case of a simple fixed deposit. Or, for that matter, you can opt for short-term bond funds or liquid funds to get quick access to your money with very low risk. For example, I divide my emergency money between a vanilla fixed deposit and an arbitrage fund. Arbitrage funds represent a type of equity market opportunity, hedged from risk, where the return itself is very low.
Salient Features Of Emergency Funds
When an emergency crops up, you want money to be dispelled immediately. These liquid funds though fast, still take a T+1 day for the amount to get fully settled. In such a scenario, using your credit card can prove to be an astute move. You can use your card for immediate expenses and repay the bill once you get your liquid funds, taking advantage of the bank’s free credit period.
After using your emergency fund, replenish it. Too often, people save an emergency fund and later use the money for things that aren’t emergencies, like purchasing a new phone or taking a vacation. Never forget why you saved up that emergency fund in the first place.
An emergency fund is essential in order to be disposed toward better financial stability in unforeseen circumstances. Determining the proper amount, saving steadily, then choosing wisely where to park your funds will ensure that you are ready for any emergency.
