What is an Emergency Fund?
An Emergency Fund is your financial cushion that will help you through any rainy days in life. If there ever comes a time when you need some money at short notice, your emergency fund is your saviour.
An Emergency Fund sounds like a good idea, right? Wondering how you can build one? We’ll get to that. First, let’s tell you a few benefits of an Emergency Fund.
Benefits of an Emergency Fund
Financial security keeps stress at bay. An Emergency Fund is your financial safety net. Be prepared for anything that life may throw at you. If you’ve got your Emergency Fund, you’re set.
- Helps you to avoid spending on a whim
You could save your emergency fund in a Fixed Deposit. In case of a real emergency, liquidating your Fixed Deposits is no hassle at all. Don’t give in to temptation and break your Fixed Deposits just to splurge on something you’ve been wanting for a while.
- An Emergency Fund means goodbye to borrowing
Need quick access to money? With an Emergency Fund, you don’t need to contemplate borrowing money when you most need it.
- How much money is ideal to have in your Emergency Fund?
An Emergency Fund should ideally have at least 6 months’ worth of your income. If you feel you can save more in your Emergency Fund, go ahead. The more, the better.
- Something is better than nothing
If you don’t think you can save enough, don’t worry. Start saving with smaller amounts regularly. Save a little from every pay cheque. After a few months, you’ll be ogling at your bank statement.
Tip: What’s important is that you save regularly.
Creating an Emergency Fund is easy
We’re here to help. Let’s tell you how you can create your emergency fund.
- Financial Planning 101
Decide how much you can comfortably put away every month. Do you know how much your income and expenditure is every month? Get a clear picture of this and you can set aside a certain amount in your Emergency Fund.
- Stick to a budget
Once you have an idea of your monthly expenses, you can create a realistic budget. And stick to it. If you can do that, you will have the pleasure of watching your Emergency Fund grow.
- Ensure your Emergency Fund gives you quick liquidity
The primary reason for an Emergency Fund is to give you easy access to money when you need it. Especially at short notice. That’s why we suggest that you open an FD or invest in Liquid Funds.
- Automate your savings
You can instruct your bank to debit your account with a certain amount periodically and transfer it to your Emergency Fund account. That way, you need not worry about adding the money to the account yourself.
- Increase your deposits to your Emergency Fund whenever you can
You should try to increase the deposits to your Emergency Fund periodically. The bigger your safety net the better, right?
- Don’t touch the money. Just don’t. Unless you really need it
Follow the “out of sight, out of mind” rule if you want to build an Emergency Fund. Access your Emergency Fund only when you really need the money.
Best way? Try starting a Recurring Deposit (RD) to build your Emergency Fund.
And that folks, is how you create and maintain an Emergency Fund.