Table of Contents
What is the Importance of an Emergency Fund?
How Much Money to Have in Your Emergency Fund?
How Should You Build an Emergency Fund?
Smart Tips for Faster Emergency Fund Building
Life has many surprises and some of them can be really unpleasant for you. There can be emergencies in the form of sudden job loss, sudden need to repair your car, unexpected medical bills and more. During these times, an emergency fund can be very useful for you. It can provide you with the money to deal with all these unexpected storms in life.
Read and find out how to create an emergency fund in 2024 and how to use it intelligently when life tries to throw you off balance.
Open an account with Angel One.
What is the Importance of an Emergency Fund?
An emergency fund can provide you with a financial cushion or safety net during all those unpleasant situations in life when you need money to get out of the mess. Rather than feeling helpless, you can feel self assured.
You can maintain your financial stability and prevent debt problems. There is no need for you to rely on loans or credit cards to and the stressful financial situations.
Also check: Focused funds 2024: Top Things to Know about Focused Mutual Funds.
How Much Money to Have in Your Emergency Fund?
There is no ideal amount and your emergency fund amount should depend on your requirement and comfort level. As a thumb rule, you should try to save 3-9 months worth of essential expenses at least, in order to deal with your emergency requirements.
The amount that you put your in emergency fund should be able to cover your mortgage or rent, groceries, utilities and other important bills. In case you have dependents, just a single income source or less stable income, you should consider try trying to save as much as 9 months worth of money in your emergency fund. It is important to customize the size of your fund according to your own specific needs.
How Should You Build an Emergency Fund?
You need to follow these tips in order to build an ideal emergency fund for your needs:
1. Have realistic objectives
When you set objectives for your own emergency fund, it is essential to take your individual circumstances and needs in consideration. Before you take a decision on the extent of your emergency fund, you should consider some important factors such as:
Your income
You have to consider the amount of money that you on every month.
Your monthly expenses
It is essential to taken to account the amount of money that you need to cover your rent, transportation, food and other important expenses every month.
Your debt
It is also necessary to consider the amount of debt that you have in the market and your monthly payments for the same.
Your financial objectives
You should not ignore considering your other financial objectives, such as saving money to buy a house upon retirement or making a down payment for the same.
2. Make a list
Financial emergencies happen to be very personal in nature and the definition of the same can change from one individual to another. It is recommended that you make a defined list of possible emergency events for which you might need your emergency fund
3. Budget and track your expenses
With a proper budget in place, you can understand the areas that you are spending on as well as determine all those aspects you should cut back your expenses on. In order to make a proper budget, you should begin by tracking your expenses for a month. After you understand your spending habits, you can begin to set proper budget goals and categories.
You can budget in various ways. The 50/30/20 rule is a popular technique. In this rule, 50% of your income is allocated to essential expenses, 20% is allocated to debt repayment and savings and 30% is earmarked for discretionary expenses.
4. Make a proper plan for expense reduction
After you make a proper budget plan, you can begin to look for sound opportunities for expense reduction on your part. Some of the common methods for saving money include:
- Having your settings automated
- Creating alternative income sources
- Reducing your consumption of energy
- Having a proper negotiation with your service providers
- Shopping around to reduce expenses on insurance as well as other important services
- Finding low-cost alternatives to the brands of your choice
- Cancellation of subscriptions you do not use
- Dining out less
Smart Tips for Faster Emergency Fund Building
If you are not able to save the amount of your need immediately, start with a smaller objective and increase the amount over a period.
Automating your savings is one of the best ways to make sure that you are able to save on a consistent basis. It will help you to save money automatically and not need to think about it over and over again.
Use a money market account or savings account for storing your emergency fund, in order to ensure ease of access whenever required. It is a good idea to have a separate bank account in order to build your emergency fund. You can set up a recurring transfer to this emergency fund account from your bank account.
Try to avoid using your fund for shopping vacations or other expenses that are not urgent. Keep in mind that emergency fund creation is an activity that requires discipline and time on your part. Do not feel discouraged if you are not able to reach your objectives very quickly. Simply keep saving on a consistent basis.
Also read: Before You Invest in ELSS funds: An Important Checklist.
Circumstances keep changing in life and so, you should revisit your emergency fund from time to time. It is necessary to make sure that it aligns with your existing objectives and requirements. Over a period of time, you will manage to have a sizable fund that can offer you a financial cushion during emergency situations.
Open an account with Upstox.
Conclusion
Having an emergency fund in place is essential for almost everybody. It can provide you with the necessary financial cushion during times of unexpected crisis. You can get protection from debt problems, the ability to deal with the curveballs of life with confidence and above all – peace of mind. Creating and maintaining such a fund is a responsible and intelligent financial strategy that you should not ignore.
