We all know that life is extremely uncertain, and we never know what the future holds for us. So, it is always good to be prepared. Any age uncertainty about the age of the caregiver or even the caregiver affects the age of the family as a whole as well as their finances.

To avoid these uncertainties in life, you need an emergency fund so that you are always ready to handle whatever life throws at you – good or bad.

This article dives deeper into the world of emergency funding, examining the factors that affect the ideal amount of money to aim for and walking you through the process of building internal financial security is in the strong.

What is an emergency fund?

An emergency fund, also known as an emergency fund is a personal financial plan established as a financial protection against future accidents or unexpected expenses An important part of the financial system, it is supposed to ensure that one’s finances are prepared for any emergency Generally, the risks of running out of cash are reduced.

Emergency funds can be used for job loss, medical emergencies, car problems, repair and replacement of household appliances, and unplanned travel expenses.

Why Do I Need Emergency Funds?

An emergency savings account provides financial security that can keep you going in times of need without having to rely on credit cards or high-interest loans. Having an emergency fund can be especially important if you have debt, as it can help you avoid overdrafts.

If you don’t save, a financial shock—even a small one—can backfire, and if it turns into debt, it can have lasting effects.

Research shows that individuals who try to recover from financial shocks have few savings to help protect against future emergencies. They rely on credit cards or loans, which can lead to harder-than-average debt. They can also draw on other savings, such as pensions, to cover these expenses.

How Much Should You Save Emergency Fund?

The Three to Six Month Rule:

The answer depends on your lifestyle, monthly cost, income, and monthly expenses but a good rule of thumb is to have enough to cover three to six months’ expenses. For example, If you earn 50,000 monthly and ₹35,000 of that goes into meeting all your expenses, then your emergency fund should be something between ₹ 105,000 to ₹2,10,000 (₹35,000 multiplied by three or six).

This amount can seem intimidating at first, especially if you’re starting from scratch, but it is not really that difficult to put together. The key is to start setting aside some money each month  You may also want to consider adjusting the amount based on your bill liabilities, family needs, job stability, or other factors.

Better than nothing, so set short-term goals based on your current emergency fund budget and spending. Once you start building an emergency savings account, set a big goal and start working towards it. Eventually, you’ll set up an emergency fund to assist in case your car needs new brakes or your powerful employer fires you.

Where to keep Emergency Funds?

Where you put your emergency fund depending on your situation. You want to make sure these treasures are safe, accessible, and where you won’t be tempted to use them for non-emergency purposes.

Here are a few options for deciding where to put your emergency funds savings, and you can choose the one that makes the most sense for you:

• Emergency fund Bank account or credit union account — If you have an account with a bank or credit union—generally considered one of the safest places to put your money—It may make sense to have a dedicated account where you can store and manage this money.
• Prepaid card — A prepaid card is a card that you can load money for emergencies. It’s not connected to an emergency bank account or credit union, and you can only spend the amount that’s on your card.
• Cash — Another option is keeping money for emergencies, either in your home or with a trusted family member or friend. Keep in mind that emergency cash can be stolen, lost, or destroyed.

How to build an Emergency Fund?

Everyone’s savings are slightly different, depending on factors such as your current budget, how much you can save each month, and your existing savings. If you want to build an emergency fund from scratch, here are some tips to get you started.

1. Make a budget: Without a budget, it’s hard to reach any financial goal. Spend some time setting one up for yourself, whether you’re going the 50/30/20 route (50% needs, 30% wants, 20% savings) or to practice an emergency fund before investing (saving money in an envelope for each separate monthly expense). Be sure to contribute to your emergency fund your line item.
2. Set goals in a variety of ways: While the best emergency funds can take six months or more to implement, this can be difficult for households living paycheck to paycheck. If this defines you, set smaller, more achievable goals now and bigger ones for later. For example, aim to save $500 initially; When you get there, increase your goal to $1,000 (that’s a total savings of $1,500).
3. Automate the process: The most successful fundraising efforts are the ones you can’t screw up. By automating savings, you eliminate the risk of forgetting for a month or baulk at saving when things get tough. Set aside money to transfer from your savings to an immediate bank account immediately after payday.
4. Look for ways to increase your efforts: Sell ​​something on Facebook Marketplace. Looking for $40 saved in last summer’s coat pocket? Put the extra money in your emergency fund whenever you come up with bonus cash. You will reach your goal faster without feeling guilty.
5. Save a lot of money: There is no such thing as too much savings. Once you reach your emergency funding goal, aim to move up. Once you’ve managed to invest all six months, look into other funds that could use your efforts, such as a retirement fund or a college fund.
6. Make money with your money: Choosing the highest interest rate on your deposit will maximize your income. Look for a HYSA that compounds interest daily, not monthly.
7. The unforeseen, from your perspective: If you’re like most people, you might be tempted to dip into savings when a big purchase comes along. Keep your emergency fund account in its dedicated account. This way you must actively choose to raid it.

Conclusion

Most people today strive for financial independence at an early age. They want to retire in their forties and have all their financial needs met.

While this requires careful planning and strategic investment, it all starts with creating a fund that takes care of all unplanned expenses. While this may seem excessive in normal times, it can be extremely useful during needs such as the current lockdown.

If you haven’t already, you will begin your journey of building an emergency fund this year.

Disclaimer: This blog post is written for informational purposes only and should not be construed as financial advice of any kind. The appropriate emergency fund amount for you depends on several factors, including your income, expenses, number of dependents, employment stability, etc.

You can set your emergency fund goals using the information provided in this blog, but you should consult a qualified financial advisor before making any financial decisions.

FAQs

1. How much emergency fund should I have?

The amounts vary according to your living expenses, but the general rule of thumb is to ultimately save three to six months of living expenses

2. What is the first step to building an emergency fund?

Your first goal should be achievable, not overwhelming. Aim to save about $500 at the start. Once you reach that amount, aim for $1,000 to $2,000, reaching each goal until you have the equivalent of three to six months of spending

3. How can I create an emergency fund if I am living paycheck to paycheck?

It won’t be easy, but instead of worrying about the money you end up saving, decide what percentage of take-home pay you can do without. It could be 1% or 2%. The important thing is to save a fixed amount for paydays and not touch it. Money will add up.

4. How to secure your emergency fund?

Once you’ve saved an emergency fund, it’s important to save:

• Use Low-Risk accounting
• Avoid risky investments
• Conduct regular inspections
• Establish exclusion rules
• Communicate with relatives
• Adjust the size of your emergency credit card.

5. How Much Emergency Fund Is Required?

Everyone has different financial needs. Everyone has a unique combination of lifestyle, dependents, income and unavoidable expenses. As the math for one person will vary from that of another, it will be unique.

Before calculating how much emergency funding you need, it’s important to calculate the minimum amount by unavoidable monthly expenses.

This should include house rent, personal loans for emergency funds, instalments, utility bills, etc. Ensure the amount you set aside for this purpose does not include unfavourable costs like movie tickets, transportation, etc.