Why emergency fund is important? Why it called life saving? Our Life is full of shocks and surprises, we experience many twists and turns in our life. Unexpected expenses from losing jobs to medical emergencies. Life certainly pushes us into financial crises and life became very tough. Here is where the concept of an Emergency fund comes into play. In times of financial crises having a safety wall makes all the difference. It is designed achieve financial freedom and protect your investment and long-term financial goals. It is the first task in your early days of life before setting other financial goals. That is why we called it Plan No 1, first things which you must build before do anything.
Table of Contents
- What is an Emergency Fund?
- The Importance of an Emergency Fund.
- How much do you want to save?
- Building your Emergency Fund.
- Where to keep emergency funds.
- Conclusion
What is an Emergency Fund?
An emergency fund is essentially a pool of money set aside specifically to protect us from unexpected expenses and financial crises. It works as a protection wall, providing peace of mind and stability during tough times. These funds are a priority of your financial planning. It is not for your other planned expenses like vacations, new car or home renovations. It is built to care for your living expenses during sudden job loss, medical emergency or unavoidable expenses.
Let’s understand the importance of emergency funds. The recent coronavirus crisis highlighted the crucial role of crisis funds. People were forced to stay at home without pay. Many people lost their jobs and those who got infected faced huge medical bills. Corona makes us move to think about financial planning, saving and investing.
The world was unsure of when this pandemic would end. People use credit cards and break their investments to manage their basic living expenses. People were trapped in credit card debt or lost their savings and investments because they did not have protection provisions or funds for such situations. Crisis funds will give you a stress-free life, protect your investment and give you time to recover from situations. People who care about their families and understand the importance of money always take protection measures.
The Importance of an Emergency Fund.
Financial Security: During an economic crisis, such funds act as a shield. It ensures you can fulfil your essential living expenses without taking high-interest loans or tapping into long-term investments. The financial safety net is even more crucial for a single earner for families.
Reduce Stress: Financial worries can affect your mental and physical health. Knowing that you have a financial cushion in place can give you relief from stress and anxiety. You can focus on finding solutions during your tough times.
Debt Trap / Save Investment: Without an emergency fund, unexpected expenses often end up on credit cards or loans and are trapped in the debt cycle. It can destroy your investment, increase your financial burden and similarly disturb your plans.
How much do you want to save?
This is an important and tough question. It is a challenging question because it depends on what quality of life you decide for your loved one during crises. If you do not calculate your needs properly, can lead you to set the wrong fund size. So before deciding how much to save, first decide how much you need. The size of your crisis fund depends on various things such as your family size, income sources, monthly expenses, debt and individual circumstances.
The basic rule says you must have at least 6 to 12 months’ worth of living expenses but pandemic-like circumstances changed the rules, we experience how the worst situation can be so we must prepare ourselves for longer periods. You need to list down a list of expenses for living like medicine costs, food, lights and mobile bills, Rent or maintenance costs that are essential for living life.
Building your Emergency Fund.
Set Clear Goals: Define your financial goals and assess your current financial situation. Goals will help you to remain on track to achieve them. Goals will help you to distribute contributions properly among them, without goals is running a marathon without knowing the finish line. It motivates you and helps you to make decisions.
Create a budget: Budgeting is an important task of the financial journey. It will give you a clear picture of your finances. How much are you earning and how much are you spending? What type of expenses do you have? Budgeting will help you prioritise money distribution. If you are building a fund for the first time, you must assign more contributions to achieve as fast as possible. Money management is an important task in your life.
Increase contributions over the period: As your earnings and financial situation improve, you can increase contributions towards your trouble fund and other goals.
Discipline and Planning: Set up an auto transfer to your fund. It will ensure consistent contributions. First, achieve 6 months’ worth of expenses and then extend it to 1 year. Once you reach the 1-year goal, aim to expand the fund size. Now you can reduce your contribution and divert the surplus money to other financial goals and funds.
Where to keep emergency funds.
Emergency fund’s first condition is it must be easily accessible because an emergency will never tell you before strikes you. Your traditional savings account offers easy access to your money. But the problem with such accounts is they will not appreciate much of your money. So you can keep 20% of your fund in it. You can explore high-yield interest accounts, FDs and the money market which gives you high returns and liquidity. Read more about Liquid Mutual fund
Conclusion
It is a journey of financial stability so many things need to be done. Start your investment early in your life. Starting investment in early time and emergency funds will play a major role. It will protect your savings and peace of mind during tough financial times. Start building an emergency fund today and proactively prepare your life for uncertainty. Empower yourself to face whatever the future is, knowing that you have a strong financial foundation.
