How To Build An Emergency Fund. Personal Finance Guide

How To Build An Emergency Fund. Personal Finance Guide

Life is not just the bed of roses; instead, it is also the alias of ups and downs, twists and turns, sudden random turbulences (financial crisis, shortage of funds, etc.), which can occur at any point of time. It’s quite like

People: Finally, we are happy
Life: Knock-Knock, wait for a second!

Let me present a few examples in different scenarios for better understanding:

  1. In this pandemic situation, our economy has been affected severely. Because of the recession, a lot of people have lost their jobs; in such cases, you may suffer from a shortage of money.
  2. In case of any mishap (road accident, natural disaster, etc.) or unwanted occurrence of severe diseases (cancer or heart attack, etc.) you may need a considerable amount of funds.
  3. Even into the occurrence of an unexpected event (unplanned trips, the sudden slowdown of business, increment in the fees structure, etc.), you need funds for that too, and so on

Well, the obstacles can be in different forms, but ultimately, what we need is funds in those situations for our survival.

Here you go, let me introduce you to the Emergency Fund first!
An emergency fund is that sort of money that you have set aside to deal with life’s unexpected events or mishaps.

The biggest truth of life is that we never know what will happen next. Be it good or bad, life is full of unexpected scenarios. Therefore, it is better to be financially prepared.

Related: Debt snowball method: Guide To Be Debt Free

Now, let me show some essentials which you must need to know:

How enormous should be your emergency fund?

Let’s understand it step-by-step –

  1. Each individual has a different lifestyle, financial needs, and income and expenses are also different.
  2. You need to figure out your unavoidable expenses at the end of the month.
  3. The expenses may vary as per different individuals. Some people have to settle their monthly EMIs; some have to pay monthly house rents, and so on.
  4. When you come to know your expense pattern, you need to build cash funds to survive upcoming emergencies of at least the next 3-6 months. Here, I would want to recommend six months

Where would it be useful for you to keep your emergency savings?

  1. To be precise, it should be highly liquid. I would say a savings account is the most rational choice as it is highly liquid.
  2. Several liquid mutual funds (part of debt mutual funds) like HDFC Liquid Fund, Axis Liquid Fund, and so on are there which are highly redeemable, and liquid can also be a good option.
  3. You can invest in the money market account too. It has the highest annual percentage yield (APY) than standard savings and checking accounts and pays a higher interest rate than general savings accounts.
  4. Even if you can invest in the money market funds like HDFC money market fund, ICICI Prudential money market fund, etc. are relatively low-risk securities, secured, and safe enough. It is considered to be the least volatile of all mutual fund investments.

What point of time do you need to use an emergency fund?

Of course, when an emergency knocks your door. But before spending all your emergency funds, you should keep the following points in mind.

  1. Analyze first that if the situation is foreseen or unforeseen.
  2. If it’s unforeseen, figure out whether it is needful or not.
  3. If you found that the situation is unforeseen, needful, and extremely imperative (e.g., if any family member of yours had met with a road accident). Then, I would suggest using the emergency fund as the scenario is extremely compelling.

What are the ways to build an emergency fund?

“Your emergency fund is not an investment. It’s insurance with one purpose- to protect you and your family.” – Dave Ramsey

Emergency funds require a little bit of financial planning. Here, I will show how you can save your money to prepare a separate emergency fund.

1. Start with creating a budget

It’s a must for you to understand how much money you earn and spend. You can start making a note or list of your monthly expenses on one side and monthly income on another. Then, analyze and figure out your money habits and conclude what amount of money fits for you to keep, then develop a habit of saving those amounts at each month’s end.

Related: The Secrets of Financial Peace

2. Shear your expenses

Figure out all the unnecessary expenses and shear them. Well, apart from your basic unavoidable expenses, I would say vanishing of some of your pleasure desires make sense. Some examples are, you can easily live without credit cards, luxury brands, premium TV subscriptions, etc. You need to understand all this on your own and start cutting down useless expenses and save it for better. Your lifestyle will still be better from plenty of people who cannot even afford the basics.

3. Saving should be rational

Here you need to understand the art of saving. Adaption is the crucial aspect of saving your money logically. You may get job promotions, better opportunities to work for which you will be paid more than what you are earning before, tax refunds, etc. In such cases, your income will increase for sure, and you need to improve your savings portion.

4.Figure out new ways of earning
It will add up to your income. Suppose you have some unwanted possessions in your house, sell those online or offline, good-paying part-time work, freelancing, or other side jobs are some excellent income sources.

4. Make saving automatic

Well, automation of saving is the most superior option. Although it’s so undeniable sometimes, you may get tempted towards something, and you end up buying it. To deal with these uncontrollable situations, you need to automate savings. There are several automatic saving tools out there that directly transfer your money to your emergency fund. Further, you can also link your savings and checking accounts, or you can request your employer to directly deposit some part of income to your emergency fund account and so on.

5. Keep motivating yourself

To achieve the aim, you need to keep motivating yourself as motivation comes from inside. It is damn important to be determined and self-disciplined while dealing in terms of accomplishing any financial goals. And when you achieve the aim, it’s a joyous perk itself.

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