What is an emergency fund and why do I need one?

An emergency fund is a sum of money you have set aside specifically for emergencies.

You can use it to cover any sudden expenses that come up without borrowing from your family, friends or bank or dipping into the nest egg.

The truth is:

Emergencies are a part of life and they can come up at any time. These days, there are fewer sources of help in times of crisis.

It might be:

• the car breaking down
• a medical emergency for yourself or your family member
• a job loss
• theft at home
• you hit someone on the road in an accident and need to cover their medical expenses

If you save money every day and put it away, it’ll be available if you need it. You won’t have to borrow from the bank or someone else when an emergency happens.

How much should I have?

It depends on the person and their situation.

However, the general guideline you can follow: “Have 3 to 6 months worth of monthly expenses“.

For example:

You have a monthly expense of Rs. 60,000. Aim to save between Rs. 1.8 lakhs to 3.6 lakhs.

Start with a goal to save for 3 months and make sure you grow it to 6 months as soon as you can.

When calculating the monthly expenses, remember to include:

• loan repayments
• insurance premiums
• school fees
• rent
• grocery charges
• utility bills
• regular medicine charges (if any) for you/family members

How to save for your emergency fund

Following these steps will ensure that you start saving for emergencies as soon as possible.

Step 1: Have a monthly savings goal

For example, if you need to save Rs. 1.2 lakhs for an emergency fund. You plan to save this amount in a year’s time.

Target savings per month: Rs. 10,000

Step 2: Open a dedicated account

Open a separate savings bank account to save for your emergency fund.

This will help keep your fund in one place and avoid confusion between investment goals.

Also, this helps not to touch the money for something else.

You must have the mindset that the money in the account is available ONLY if there is a REAL emergency. For anything else – the money can’t be touched.

Step 3: Set up a monthly transfer

Transfer the appropriate amount to your emergency fund account each month.

For example, if you need Rs. 10000 per month for 12 months then set a recurring deposit every month and it will be deducted automatically from your savings account at the beginning or end of the month.

Make sure you give the highest priority to this.

Step 4: Be frugal and save on your expenses

There are many ways to save money on your expenses, and you can consider all of them.

Below is a list for your consideration:

• Reduce buying new clothes and keeping that money aside
• Save money on the go by bringing lunch from home
• Cook more at home and save on spending at restaurants
• Take public transport instead of driving
• Cut down expenses such as Amazon Prime, cable TV and other subscriptions
• Avoid impulsive buying
• Reduce/eliminate alcohol intake
• Move any additional money received to the emergency fund account

Remember:

When you are in desperate need, money in the bank will come in handy than an additional pair of fancy clothing lying in the wardrobe. Prioritize wisely.

Where to invest your emergency fund

If you have an emergency fund, it is time to decide where to invest your money.

The best ways to invest the emergency fund money is:

• Fixed Deposits
• Liquid Mutual Funds
• Savings account

Never invest your money in:

• stock market or any other high-risk avenues
• funds that have a lock-in period