Earning and saving goes side by side when a person plans their finances. Owning multiple saving accounts is a wonderful way of dividing money for any upcoming expense in the future. But the whole notion of having several bank accounts, to be ready to lump future expenses, can be tedious for people with a lean income or someone who loves spending more than saving.
Irrespective of the regular style of your savings, there is one thing you must and must do in life to keep you and your family safe in the long run. And that is an emergency fund.
An emergency fund can save you from unexpected financial risk at any moment. Usually, people save a little to moderate size of their salaries for emergency medical help in a savings account. No matter what purpose motivates you to create an emergency fund, it is always a safe idea.
In this article, we have summoned all the information you need to know about emergency funds.
What is an Emergency Fund?
A bank account with liquid cash set aside to pay large unexpected expenses can be your emergency fund. The amount of money here does matter because the saving is for a huge expense. Some of them can be:
- Major Car Expense
- Sudden Unemployment
- Expensive Home appliance repair
- Owning a property
- Emergency medical expenses
Why a savings account is the best choice to protect emergency funds is the ease of withdrawal. Other means of savings, for example, fixed & recurring deposits, mutual funds, and equity funds will not help you with instant withdrawal.
How much to keep aside for an Emergency Fund?
A minimum amount ranging from 2 lakhs to 4 lakhs is fine for a short-term emergency fund. If you are new to handling finances, try out monthly schemes from a bank providing maximum yearly interest rates, and save a fixed amount every month. The account must be separate from your regular bank account so the reserves don’t tempt your expenses.
To keep it straightforward, the amount relies on your lifestyle and the kind of expense you are about to pay. But as a good rule of thumb, try saving at least three months of your expense aside for emergencies like a job crisis. However you can keep more than 8 to 10 lakh rupees for medical or any other expense. That will be a long-term emergency fund you have secured.
5 Reasons to Save Up for an Emergency Fund
The reason can be a broken leg or a broken car. But the demand for an emergency fund entirely depends on the type of expense and some other factors we are about to reveal now.
Paying off a Debt
Emergency funds are very helpful to cut down debts at dire hours of life. Every single financial bump becomes easy to cover when you are using the emergency fund, which side by side clears off the stress from tough times. Some situations that can put you in huge debt can be a medical expense, car repair, or sudden unemployment.
Pay off your extra money right at the time of need with an emergency fund as the cushion of need.
A single source of earning
A considerable emergency fund is a necessity when you have only one source of income at the end of the month. Nine to five employees or initial breadwinners can experience a loss of job for any underlying reason on any day, which can bring a time of crisis in their lives.
If that is your case, your emergency fund must cover at least a year’s expenses for your whole family. This will keep you out of debt by the time you can get back on your feet and start life afresh.
However, if you are single or beginning to plan for a family, an emergency fund will be a precautionary measure for the future.
Self-employment or Contractual source of earning
Contractual jobs are stable but risky. So it is crucial to have a good backup for the times when you are enjoying the luxuries of unemployment. Moreover, most contractual jobs are not flexible to keep up at old ages unless you have another passive source of income to pay for your retirement.
Have a good emergency fund ready as contractual jobs might close down very soon. If you run your company, it can also face an employee shortage leaving your company at huge risk. The ideal deal to cope with both situations will be to save more when the business is running smoothly.
Also, keeping your business up to date with the clients will save you from paying outstanding from the emergency fund on low-earning days.
Living Away From Family
Big-city life can be expensive to pay a visit to your family. Moreover, the cost can double if the reason for the visit requires purchasing last-minute tickets. Having a good emergency fund will help you save up for situations like this and make immediate decisions.
However, you can start to gear up for such a situation in the following ways –
- Take a look at the airplane ticket price, both regular and emergency included, and keep a budget for emergency travel so that you can save accordingly.
- For students living far away, save a little money from daily expenses which will naturally give you a good amount by the end of the month for emergency use.
You’re new to budgeting
Creating an emergency fund is completely hassle-free. This is why you should right away take action and start saving under a bank with profitable interest rates.
This fund can pay off a part of your annual expenses on gifts, organizations, or taxes, without adding pressure on your budget expense.
Final Words
As unplanned as expenses can be, it can be stressful to adjust them in your budget. If you save money for emergency use, you can avoid indulging in debt and steadily face any financial storm that comes your way. After all, we have one life, so it is better to live stress-free!
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