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.
27 replies on “Emergency Fund- We all need it but do you save for it?”
I’m learning a lot from your posts. I’ve never really bothered to be aware and intentional about my finances and that’s a mistake.
I’m glad you are learning from my blogs. Finance is something we take lightly but a little seriousness can take us a long way.
the importance of having an emergency fund couldn’t have been put in a better way. i really like how simply you’ve explained it
Thanks a lot. I tried to keep it as simple as possible for my readers to understand
Some factors that are completely lost when planning finances and emergency funds seem to be one of them. Pandemic has definitely taught us otherwise.
True that… emergency funds help in scenarios like this pandemic
[…] Fund: In my earlier blog on Emergency Fund, I had shared why it is important and not to be missed when budgeting. When you don’t save up for […]
[…] Emergency Fund: Emergency comes without knocking and its always better to be prepared for it. Putting money aside for emergency can help meet the unplanned and sudden expenses. Emergency fund acts as an insurance to your finances. Your goal should be to save at least 3 to 6 months of your salary as your emergency fund. It again depends on your job security, income, debt if any and if you are a single- or double-income household. You want to easily access your money in emergency so put the money where you can easily get it out from and also your principal amount is not at risk of loss. Go for more liquid options like savings account. To know and understand more about Emergency Fund read my earlier blog “Emergency Fund – we all need it but do we save for it?” […]
Oh yes I completely agree.. Emergency fund are very crucial thanks for these wonderful tips. Emergency Fund should amount to at least 6 months of your salary or income..well this is so true.
Do not mix emergency fund with piggy bank is a very important point. I guess not with the pandemic, we should thin k of having an emergency fund.
emergency funds are important part of finance and you have explained it so well. I strongly agree on point of using cash instead card, it helps in getting better visibility and also help in reducing extra expenses.
I couldn’t agree more, an emergency fund is indeed a necessity and must be taken care of as a priority not what is left after expense. I am loving this series of financial tips and tricks we get to read via these blogs 🙂
It’s so important to hold and invest your finances so that we don’t have to depend on anyone at the time of emergency. Thanks for this insightful post.
oh yes..i would say the pandemic was a eye opener for us. Emergency fund is much needed and we all must plan it safely
Your posts on budgeting and finances are really helpful. I learnt quite a few tips and tricks.
Life is so uncertain and emergency fund is always mandatory to be saved thank you for explaing so well which we have to focus on time.
My father has taught me that we should always have a contingency plan. This makes total sense because emergency funds are what could save us in tough times.
Saving for a rainy day is so important. Emergencies are a fact of life and hence one needs to have contingency funds. This can be done by setting out a portion every month. Very informative post.
I really loved your tips in this series I hope you hve converted them into an ebook. It will be a really worthy handbook
The term emergency fund has become so important now. Seeing what all is happening around. It is better to have savings
FDs and RDs have often been used to save up for emergency funds. I like the idea of saving for them separately since it helps keep us well-prepared.
I have a habit of keeping emergency funds, ever since struck with fighting for more ages ago. Glad to read this detailed and very informative post on financial planning.
I am so glad I bumped into your post right in time. My husband and I had our past 10 yrs’ savings and were thinking of butying a new car with that amount. Seems like your blog is a sign that we should think over our decision once again.
Emergency fund is indeed important and should be kept aside. In order to earn on that emergency fund also so we have set up SIPs without lock in so that we can remove money if needed ever.
your blog has helped me to realise the value or funds in emergency. I ll also try to start saving a little now.
[…] fund: In my earlier blog, I had spoken about what is an Emergency Fund and why it is needed (Read here). Emergency fund gives you the much-needed cushion to meet the unplanned expenses like emergency […]
Good post – very educational.