Building a Solid Emergency Fund in 5 Simple Moves

Uncertainty is a part of life. Some days things go according to your plan, some days bring unexpected challenges(Solid Emergency Fund). And these challenges come with financial constraints.

So what is the solution?

Solid Emergency Fund

Now, before explaining the 5 steps to building a solid emergency fund, let’s first understand what exactly an emergency fund is and how it acts as a cash buffer against financial uncertainty.

In simple terms, as the name suggests, it is a fund created to get financial help in case of emergency or unexpected events. But it is important to note that it is not like a savings account or insurance. The main reason for this is that a savings account is used to set aside money to meet your goals. And although the purpose of insurance is to help you during certain financial emergencies, it does not cover every type of unexpected financial need.

Emergencies can come in any form, so even with insurance coverage, it is important to maintain an emergency fund to protect yourself and your loved ones from any unexpected financial crisis.

According to a case study by British international internet-based market research YouGov in 2021, only 2 in 5 urban Indians consider saving for an emergency to be their top priority. This major financial planning mistake often leads to difficulty in arranging funds in case of emergency or forces you to withdraw your investments or savings.

So, secure your portfolio by understanding the 5 steps to building an emergency fund.

1. Set up a separate account for your emergency fund

As we mentioned earlier, an emergency fund is different from a savings account. Therefore, you need to create a separate account that caters only to your emergency needs. Moreover, it makes it easier for you to track the progress of your fund and helps you plan more efficiently based on results. A liquid mutual fund or any other debt fund where you can get instant withdrawal facility are some options that you can consider to keep money in case of emergency.

     In short, keeping your emergency fund separate from your primary accounts will simplify your financial management and make things easier during tough times.

2. Calculate how much money you want to keep in an emergency fund

A standard amount that experts generally recommend keeping in an emergency fund is six months of your living expenses. This includes your rent, utilities, food, loans, memberships and other recurring expenses. However, if you have very little job security, you may want to consider saving 8 to 10 months of your living expenses in an emergency fund. Based on this parameter, you can calculate and decide the target amount you want to set for your emergency fund.

3. Automate your savings in an emergency fund

One of the best ways to ensure consistent contributions to an emergency fund is to set up automatic transfers. You can also opt for a sweep-in fixed deposit facility offered by banks. This facility links your savings account with your FD and allows you to transfer surplus or idle funds from your bank account to your FD account so that you can earn higher returns.

     This way a portion of your income will be regularly directed towards your emergency fund making it a convenient and hassle free way to maintain an adequate balance in your fund. Additionally, it regulates a disciplined system in which you won’t forget to initiate transfers and helps you prioritise your financial well-being.

4. Create a budget and identify areas you can save money to contribute to your emergency fund

Many times you may find it difficult to meet the monthly target you have set for your emergency fund due to rising costs of your daily household utilities, lack of tax-saving schemes, lifestyle adjustments etc. So this is important. Prepare a budget and analyze areas where you can avoid unnecessary expenses and save more to contribute to your fund. This will not only build a strong emergency fund but also help inculcate the habit of saving.

5. Be disciplined and avoid dipping into the emergency fund for non-emergency expenses

It is important to distinguish between your emergency and non-emergency expenses. If you start using your emergency fund for any major expenses, you won’t have enough funds left in case of any real financial emergency. The key is to be disciplined with your funds and avoid unnecessary withdrawals.

conclusion

Finally, an Solid Emergency Fund is a great way to start preparing yourself financially for any eventuality. By following the 5 steps mentioned above and staying committed to your financial goals, you can build a strong foundation for your financial growth. Contact Our Financial Expert