Emergency= a serious, unexpected, and often dangerous situation requiring immediate action.
An emergency can come in any form like a health emergency, financial emergency/job loss and many other forms, which requires immediate attention and financial resources to handle the crisis.
Without adequate financial resources, it is very challenging to manage the situation and can result in a massive financial blow and destabilize your life.
For sure, no one wants to get into such a type of situation in life, but life is uncertain and serious and unexpected situations can strike anytime. Therefore, you need to be always prepared to face such situations in life with strong hands and a calm head.
This is where the Emergency Fund comes into play. It covers you from unexpected financial blows. Think of it as an insurance policy, that you can access at no time of the occurrence of an unexpected event.
It is not important, whether you are salaried or self-employed, having an emergency fund is a must for all.
So, let’s begin by checking how much amount you should keep aside as an emergency fund.
Finding Out the Right Amount
Determining the right amount is very important. Many financial advisors and experts suggest having a minimum of three months and a maximum of six months worth of salary as an emergency fund.
But, you should calculate the amount based on factors like job-stability, lifestyle, monthly expenses, income and dependents.
Suppose, you have a stable job with a monthly income of Rs 50,000 and expenses at Rs 35,000, then your emergency fund should be around 3-4 months of expense level. Likewise, you should increase the amount, if you have a less secure job.
In the time of crisis, the emergency fund should easily take care of essential expenses for more days than planned by cutting on costs.
Where should you keep your emergency fund?
The emergency fund should be kept at the savings bank account, which can be accessed very easily without taxes and penalty. If you are considering fixed deposits with the bank, deposit a small portion of the amount to have enough liquidity. You should remember, an emergency fund is not for profiting.
How to build an emergency fund?
Rome wasn’t built in a day, similarly, your emergency fund cannot be built overnight. It needs months of disciplined saving in a separate bank account until the desired amount is reached.
It is fine to delay your other investments to speed up the process for the creation of an emergency fund. The sooner you build it, the better will be your financial stability.
Benefits of an Emergency Fund
You can Avoid Debt: It helps you to avoid debt with every financial blow. You can use your emergency funds to cover the expenses resulting from unexpected events like medical emergencies, car repairs, etc without the need to take a loan.
Brings in the financial discipline: The quantum of an emergency fund is primarily based on your monthly expenses. Higher the level of expenses, you need to create a bigger contingency fund.
By keeping a share of your income aside for an emergency fund, you don’t spend it on a whim, that also helps to lower your expenses and increases savings.
Having a contingency fund also helps you to protect your other long term crucial savings like the retirement savings. You don’t have to stop or lower your savings rate for your other investments during exigencies.
Peace of Mind: The most important, it gives you peace of mind. It gives you confidence in life by minimising your financial stress and the ability to manage the situation if any unforeseen event strikes. Having an emergency fund helps you to take calculated risks, which is important for growing in life.
Many miss the importance of having an emergency fund in life along with other investments and insurance policies. Although there is initial financial pain in the creation of the fund, it will make you less stressful, when that rainy day arrives.
Always work towards strengthening your financial health in life. Increase the quantum of your emergency fund with the change in lifestyle, income, expenses and dependents.