Creating an emergency fund means keeping some liquid money in reserve and using it strictly for emergencies. You must also know that this money is kept separately from routine cash expenses. It should also not be invested in stocks, bonds, SIPs, etc.
It is essential to consider and build emergency funds for your financial security. It can save you from the hassle of borrowing at unexpected times and then having difficulty repaying the dues.
The Importance of Emergency Fund
Without an emergency fund, a heavy expense will be like a major setback! If you have a good credit score and meet other lender requirements, you can take loans but that might pile up a debt on you. It is suggested that you should always have considerable savings to protect you against any emergency.
Tips for Building Emergency Fund
You can build an emergency fund over a few years. We can help you know how can you build an emergency fund and maintain it.
1. Create a Savings Account
Open a new savings bank account to keep your emergency funds. You might link this account to your other accounts. Ensure not to keep emergency funds in your regular salary or savings account, as you will end up spending the amount on routine purchases. Some people want this money in a more accessible form but do not instantly keep it in cash at home. Especially the senior citizens who live alone keep this money hidden at some place in the home, so that they don’t have to do bank transactions in emergency situations.
2. Look for High-Interest Account
Also, when you open an account, choose one that pays you good interest. Some savings account offers only a small annual interest. If you can fulfill the minimum deposit or fixed deposit requirements, then you may find one that paybacks a decent interest rate.
3. Cover for At Least 6 Months
Now, if you are thinking about how much is the least amount you should save for emergencies, then you must have a backup of at least six months. If you enter into an unwanted scenario of a job loss, you should be able to manage your expenses for a minimum of six months. That period is long enough to provide you with a good chance to look for a new job or find some other option.
You should decide an amount in the emergency fund according to the number of people in your family, expenditure pattern, whether your spouse or parents have a job, etc. If you are the only earning member in the home and have a family to support, then you should save a considerable amount to meet your family’s needs in emergencies.
4. Start With A Small Amount
If you don’t have much money to spare in the beginning, that doesn’t mean that you should begin saving for an emergency fund. Start with a small cash amount and then gradually build up your savings.
5. Set Automatic Transfer
One of the best ways to have an assured emergency fund saving is by setting an autopay. This feature automatically transfers a certain amount from your salary to your emergency savings bank account every month. Once you reach your target, you can change the setting or notify the bank about not using the autopay option anymore.
6. Use Only in True Emergencies
The only rule of using emergency money is that you can only use it in extreme conditions like medical emergencies, immediate car repair needs, job loss, home repair, etc. Once you use a certain amount from the funds or exhaust the entire amount, replenish the same at the earliest. You never know; you may get into another urgent situation soon!
7. Review your Progress
Once you have an emergency fund, keep regularly checking the savings. You can ask the bank to send you weekly account balance notifications. Watching your amount grow until you reach a specific amount of progress is a gratifying experience and keeps you motivated.
Wrapping Up
Having an emergency fund can help you keep calm during financial challenges. To build one, open a separate savings account, use auto-pay to transfer funds in it automatically, smart small but save for the expenses of at least six months, and use it only in emergency cases.
FAQs
1. Why is an emergency fund important for everyone?
Ans. An emergency fund saves you and helps you manage expenses during financial emergencies. Without these savings, you might have to take debt, having a lasting impact on your future.
2. How much emergency fund do I need?
Ans. Ideally, you should have enough savings that cover your expenses for at least six months.
3. How do I build an emergency fund?
Ans. Using different steps like opening a separate savings account, starting with a limited amount and then collecting more gradually, setting auto-transfer, etc., can get you started.
4. Where to keep my emergency fund?
Ans. You can put emergency funds in a safe savings bank account or accessible cash home locker. While a bank account is considered safest and also helps you grow interest, keeping it in cash at your home makes it more accessible.
5. When should I use emergency funds?
Ans. Use these funds only for emergencies like a medical bill, a broken car, a sudden home improvement need, etc.