“I will manage it when the time comes.”
“We can always ask friends and family to help me out in times of need.”
“With all of these monthly expenses, I don’t have any money to save for an emergency!”
How many times have you found yourself saying one these statements to yourself? Our guess is often (sighs). It is in the nature of human beings to procrastinate. It is more so, in their nature to assume that bad things happen only to other people. We can assure you that emergencies often come up when you least expect them, when you are least prepared for the worst!
Our point is that when the time comes, you should have your armour on to deal with any kind of adversity that may fall on you.
Table of Content
What is an Emergency Fund?
An emergency fund is an amount of money that you set aside from your weekly/monthly expenses into a separate account (preferably) demarcated to be used only during emergencies.
Consider it an emergency “insurance” policy that you set up for yourself without any formal intervention. You can think of the money you put aside as the insurance “premium” which will help you in providing for yourself and your family during testing times.
Why do you Need an Emergency Fund?
Losing your job due to recession, your house needing an urgent and indispensable repair or getting into a medical situation – all these situations don’t ring alarm bells before knocking at your door. There is a very famous quote by renowned 18th century author and politician Benjamin Franklin that says, “By failing to prepare, you are preparing to fail.”
Creating an emergency fund will give a safety cushion over unexpected testing times in life. Take for example, the Covid-19 triggered economic crisis. Millions of people lost their jobs globally and how many of them do you think were prepared to take this massive hit?
For troubling times like those, having an emergency fund really gives a sense of security and an invaluable peace of mind. So, march on soldiers and build yourselves an emergency fund today!
What are its Features?
The primary feature of an emergency fund should be its easy accessibility. After all, what use is an emergency fund if the money isn’t available right away when you need it. Since the intent of these emergency funds is to be easily available for any urgent expenses, they have to fulfill the following criteria:
- Unaffected by markets: Emergency funds have to be invested in securities that are not affected by the market highs or lows. They should be stable.
- Highly Liquid: These funds should be available for withdrawal anytime you want.
- Should Earn: These funds should be invested in safe instruments that generate some returns while they are lying parked for an urgent withdrawal.
Where should you Park your Emergency Fund?
All of the above being said, you can keep your emergency fund money in 2 popular places:
- Savings Bank Account: Savings bank accounts allow you to safely park your money which is easily withdrawn while earning minimal returns.
- Liquid Mutual Funds: Liquid mutual funds offer fantastic returns while offering the same liquidity (ease of withdrawal) as a savings bank account.
How much Amount should you put in it?
One of the most important questions that must be answered in context to creating an emergency fund is how much money should be put in it? After all, how much money is enough money! As advised by financial planning experts, an amount of money worth 6 months of expenses is good enough for keeping in your emergency fund.
This money can really do wonders if you lose your job unexpectedly as you get enough time to be on the lookout for a new one. However, if you are a freelancer or are into a business that gives erratic results and income then it will be advised to keep more than 6 months of expenses.
A lot of it also depends on your marital status. In case you are a bachelor, and you are able to save only worth 4 months of expenses then it is still alright as you may be able to sustain yourself for a couple of extra months by cutting down on unneeded expenditures. However, if you have a family to sustain then 6 months of expenses is non-negotiable.
Biggest Question – How to Save Money for putting in an Emergency Fund?
Firstly, we need to understand that you have some expenses that are totally non-negotiable. There’s rent, transportation, food & nutrition, child’s tuition fees and many others based on your personal circumstances. You can determine what amount remains from your income after you fulfill all these basic expenses. Some of that amount can then be put into creating your emergency fund.
For example, if you earn Rs. 35,000 every month and all these expenses amount to Rs. 28,000 then out of the remaining Rs. 7,000, put aside at least Rs. 3,000 in your emergency fund.
Running tight on money? Even if you are having a hard time with money, you’ve got to realise how an emergency fund is not a luxury but a necessity. This is not the money you will use, to go to the cinema or order clothes and food, this money means serious business!
Since, we have established that its importance is not debatable, you might have to cut out a few extra expenses for a few months, and really focus on saving as much as you can. All in all, the idea is to start saving for an emergency by setting aside some money somewhere, even if a small amount.