Emergency Fund, like the name says it, is for meeting some unexpected, unplanned expenses. Sometimes these expenses can be so high that it can blow away your entire savings and even put you in a debt.
There are chances that while budgeting, you may skip out on keeping aside some emergency fund but understand that this fund acts as a shock absorber for the bumps in your life.
While some think that meager one- or two-months’ salary/income is enough to be kept as a reserve, don’t forget that when unplanned expense hits, you don’t want to go in a debt, so better be prepared.
The amount needed for emergency fund needs to be significant because we live in an uncertain time and like in a current scenario of Covid 19, one’s savings were hit the most. Also, job security is a thing of the past. Getting a pink slip from your boss can be sudden and unexpected. A hefty hospital bill due to an illness or accident or an urgent house repair, all need money and we know there is never a good time for these things to happen and they come without knocking the door.
Emergency Fund should amount to at least 6 months of your salary or income. You should have that much money to help you face a situation you were not prepared for. unplanned expenses can drain out every penny of your account and you need something to fall back on.
So, let’s see how you can save up for emergency fund.
Firstly, you need to identify your monthly expenses, fixed and variable both. Fixed being your EMI’s, rent, school fees, gas and other expenses which you will incur every month. Variables include you going for dinners, movies or shopping. Once you know your expenses, multiply it by 3 and if you want to be safer, multiply it by 6. That’s the amount you need to keep aside as a reserve. So if your monthly expense comes to INR 30,000/-, you need to set aside 30 x 6, INR 180,000/-
So now that we know the amount that we need, let’s see how we can start saving. Firstly, when you make your monthly budget, allocate some fund to emergency account as well. Apart from that, small lifestyle changes can help you attain your target. Cut down on the amount you spend on dinning out or shop a little less. Walk instead of using the car and you save some bucks on the gas and be fit as well. It’s easy to swipe the card but when you pay in cash, you know exactly how much you have spent and where you need to stop. So keep that card back and remove the money from your wallet the next time you get anything.
And if you lack dedication to save up and don’t want to cut short on your lifestyle, you can still attain the goal though a little late. Take out those loose change from your pocket each day and put it in a jar. If you get a bonus or a raise, keep some money out before you party with your friends. A tax refund, a cash back on your credit card, these are all extra income that has come to you, so you can surely put that money aside without it impacting your lifestyle.
If you don’t wish to keep this money in cash, you can park that amount in either sort term bank fixed deposits, recurring deposits or debt instruments as you need safe and liquid options so that your money is accessible in the time of need.
Do not mix your emergency fund as your piggy bank which you can break whenever you want. Rather watch it as an insurance policy which will help you in the time of crisis. Be mindful of how you spend this money when you have to because remember, you will have to start all over again once your emergency fund is exhausted.
Emergency fund gives you support in the time of crisis without you running into a debt, taking a loan or swiping the credit card. So next time, when you think about spending, also think about saving for emergencies.
In my next blog I will talk about how to organize once finances.
Till next time,
This blog is a part of Blogchatter’s #blogchatterA2Z challenge.