Emergency Fund: Why You Need It and How to Create It
What is an Emergency Fund?
An emergency fund is money that you have set aside for unexpected costs. It is a type of financial buffer. You may use it to cover medical expenses, loss of employment, or emergency repairs.
Why Is an Emergency Fund Essential in India?
In India, most individuals encounter unforeseen expenses. Medical bills, job insecurity, and family crises are usual. Without savings, these incidents can lead to stress and debt.
Let’s understand why an emergency fund is essential:
- Increasing medical bills: Hospital bills are rising every year.
- Job insecurity: Layoffs and delayed salaries are on the rise.
- Natural disasters: Floods and other calamities can destroy homes and possessions.
- Family emergencies: You might need to assist parents or family members during crises.
How Much Should You Save?
A decent emergency fund should be equal to 3 to 6 months of expenses. If you are a self-employed person, try for a minimum of 6 months. First, determine your monthly expenses. Include rent, food, bills, and EMIs.
Here’s an example:
Monthly expenses = ₹30,000
Emergency fund goal (6 months) = ₹1,80,000
Don’t worry if you have to start small. The idea is to be consistent.
Where Should You Keep the Emergency Fund?
Keep your emergency fund liquid and secure. Following are good options in India:
- Savings Account: Low risk and easy to withdraw.
- Fixed Deposits (FDs): Better returns than savings account.
- Liquid Mutual Funds: For slightly better returns with instant access.
Avoid investing emergency funds in stocks or long-term schemes.
How to Build Your Emergency Fund Step-by-Step
Step 1: Set a goal
Determine how much you require. Divide it into monthly savings goals.
Step 2: Open a different account
Do not commingle this money with your regular account. Open a separate bank account or FD.
Step 3: Automate savings
Utilize auto-debit to move a fixed amount regularly. It creates a habit.
Step 4: Reduce unnecessary expenses
Stay away from impulse purchases. Small reductions in shopping or dining out make you save quicker.
Step 5: Utilize additional income
Bonuses, tax rebates, or freelance income can increase your fund.
Tips to Keep Your Emergency Fund
- Don’t touch it unless you must. This is for emergencies only.
- Check on it annually. Adjust your fund level if costs increase.
- Replenish after depletion. If you take out, resume savings.
Common Mistakes To Avoid
- Investing it in risky investments such as stocks or cryptocurrency.
Applying it towards budgeted expenses such as vacations or shopping. - Not keeping it current as life evolves (marriage, children, etc.).
Final Thoughts
An emergency fund provides peace of mind. In today’s unpredictable world, it insulates you from unexpected shocks. Begin today—even ₹500 a month will make a difference. Create your safety net and remain financially secure.
Disclaimer: Information contained in this article is for informational purposes only. Growthinfy and the author do not accept any liability for any financial decisions made on the basis of this information. Consult a certified financial planner before making any investment or savings choice.
