Life is uncertain, it shows bad and good phases. With rising inflation, managing expenses is a herculean task and with advent of new technology, our job is becoming vulnerable too. You and I generally face unexpected expenses that hit hard on our finances and disturb our investment goals.
That’s where an emergency fund comes in – a safety net to catch you when life throws those financial burdens. But how much should you save? How do you get started? This guide equips you with effective strategies to build a robust emergency fund with planning and achieve financial peace of mind.
Why is an Emergency Fund Important?
When I started investment and saw my portfolio growing, I observed the most important thing that no one has shared or taught.
“Investment is directly proportional to savings with yearly returns, condition of regular amount of fixed investment on regular intervals remains unchanged”
Do you think, Is that easy to keep investing without disturbing your investment or adjusting goals, when you are aiming for 20-25 years goals in mind? Of course not, as life is too uncertain.
You can start your financial planning only when you have some emergency funds or savings in your bank account. You can follow my calculator – Financial Planning Tool for your Monthly Investment to know where and how to invest after saving some amount of money as emergency funds.
An emergency fund empowers you to handle the situations calmly and confidently, without jeopardizing your financial well-being, such as –
- Help in avoiding derailing your long-term goals like a dream vacation or a down payment on a house.
- Loans or Credit card debt can affect your financial planning and add significant financial stress, and in this situation, emergency funds come as a savior.
- Setting off medical bills or car repairs, tuition fees in case of emergency.
How Much Should You Save?
Financial experts generally recommend saving 3-6 months worth of living expenses in your emergency fund. This amount can vary depending on your circumstances. Here are some factors to consider:
- With higher income, you can save a larger emergency fund. Focus on increasing your salary, focus on skills so that you can comfortably achieve your goals.
- Individuals with dependents may need a bigger buffer to account for unexpected costs. You will need to do calculations for the right amount needed to save for members in an emergency.
- If your job has a higher risk of layoffs, you might want to aim for a larger emergency fund.
Strategies for Building Your Emergency Fund
Next, we’ll make a plan to save money for emergencies. We’ll do this without messing up your plans for investing in the future.
1. Track your expenses: Understanding your spending habits, saving habits, allows you to identify areas to cut unnecessary expenses and free up extra cash for savings.
2. Automate your savings: I would suggest you keep at least 2 bank accounts. Every month transfer some amount from your salary account to savings account and don’t touch it and promise yourself that you will use it in an emergency only. This “transfer it and forget it” approach ensures consistent saving.
3. Embrace the “No Spend Challenges”: Challenge yourself to avoid unnecessary spending for a set period (e.g., a week or a month) and divert the saved amount to your emergency fund.
4. Avoid unnecessary online shopping: Keep checking on your online shopping. Nowadays, it is easy to shop online, but sometimes we fall into buying unnecessary items or stuff which you can avoid from buying. Use the proceeds to boost your emergency fund.
5. Review your bills: It is advisable to look at your credit card bills and try to minimize the same. Try to use cash or UPI payment so that you can track your expenses wisely and limit yourself to spending only a fixed amount in a month.
Where to Keep Your Emergency Fund
Choose an account that offers easy access to your funds but discourages frequent withdrawals. Here are some good options:
1. You can create an RD account where you can deposit small amounts and get higher returns than a savings account.
2. Money market account offers slightly higher interest rates than a savings account with limited check-writing capabilities, encouraging you to save.
3. Make FDs that you can break any time. Make FD of small amounts instead of making a big amount. When there is an emergency, you will break only small FDs keeping other FDs intact.
Building an emergency fund is a marathon, not a sprint. Be patient, stay consistent, and celebrate your milestones. Remember, every rupee saved brings you closer to financial security and peace of mind. Still Confused! Always take expert advice that can help you in achieving your goals
