An emergency fund is a reserve of money that can cater for emergencies. This could be anything from medical issues, home repairs, loss of a job, or any other short-term fluctuation in income. Here are the benefits of a contingency fund -
∙ Financial stability
It helps you survive during a difficult period without having to borrow money to do so.
∙ Stress reduction
Realising that you have money prepared for emergencies may help eliminate anxieties and provide comfort.
∙ Avoiding debt
It assists to steer clear of costly credit decisions like credit cards and other unsecured loans.
∙ Protecting investments
You will not be forced to sell long-term investments that may lead to losses or fines before you are ready to do so.
∙ Ensuring continuity
Helps you stay on financial plan even when things do not go as planned.
Determining how much you need in your emergency fund requires several steps and foresight about your future spending pattern.
∙ Assess your essential monthly expenses
List down your basic monthly expenses including rent, food, and electricity among other necessary expenses. For instance, in case your total monthly expenses amount to Rs 30,000, this is your starting point.
∙ Consider your income stability
For those with a steady income, it is recommended to have at least 3-6 months of your expenses. For people who have unstable incomes, it is better to have at least 6 months of savings. For instance, a freelancer with monthly expenditures of Rs 30,000 may need an emergency fund of at least Rs 180,000.
∙ Factor in family obligations
If you have dependents, there is a possibility that your emergency fund requirements will be higher. Make necessary changes to the calculations depending on the additional requirements of other members of the family.
∙ Use a savings calculator
An online savings calculator can assist in estimating the amount of money one should save per month to achieve the set amount within a given period.
∙ Start small
When it comes to establishing an emergency fund, the best approach is to start small and save as much as you can. It is possible to save a small amount of money every day, for instance, Rs 500 or Rs 1,000 per month, and end up with a reasonable amount of money. This is particularly useful for individuals who may feel pressured when it comes to saving big chunks of money. When you start small, you develop the habit of saving which is key in managing your finances.
∙ Set up a dedicated savings account
It is recommended to open a different account for the emergency fund so that you would not be tempted to use this money for regular purchases or other non-urgent needs. It also aids in compartmentalising this fund in your mind as one that should not be touched unless in dire circumstances and helps in monitoring your progress of saving for the emergency fund.
∙ Automate your savings
Automation is a strong ally when it comes to keeping the consistency of savings. If you set up a direct transfer from your salary account to your emergency fund as soon as you are paid, you are less likely to spend the money on other things. Automation means that you automatically deposit into your emergency fund without having to be reminded to do so every month.
∙ Cut back on non-essentials
To increase your ability to save, you should cut on some of the unnecessary expenses that you may incur. This may include eating out less often, not subscribing to various services that are not essential, or avoiding making unplanned purchases. Redirecting the money, you save from such measures to your emergency fund can help to build the fund much faster.
∙ Increase your income
If trimming costs is not sufficient to grow your emergency fund as fast as you would like, find strategies to boost your income. This could be by working as a freelancer, doing a second job, or doing other related jobs within your area of speciality. Extra sources of income can contribute significantly to your emergency fund.
∙ Sell unwanted items
Start by searching for items in your home that you do not use or need anymore. Such products can be sold to generate quick revenues. Platforms like OLX, Quikr, or even local community groups on social media can be effective for selling items ranging from electronics to furniture. The proceeds from these sales can be funnelled directly into your emergency fund.
∙ Use windfalls wisely
Sometimes you may be blessed with certain amounts of money such as bonuses, tax returns or even inheritances. Investing a portion of these windfalls into an emergency fund can significantly improve your balance. This approach enables you to grow your fund rapidly without causing strain on your daily expenses.
∙ Review and adjust regularly
People grow older and their financial status also changes. It is important to review your emergency fund at least once a year to confirm it still meets your needs. During these reviews, you may need to scale down your contributions if your living costs have gone up or if you simply want to keep the value of the fund intact against inflation.
∙ Keep it liquid
Accessibility is crucial for an emergency fund. It should be kept in a high-yield savings account or a similar liquid financial instrument, ensuring that you can access these funds quickly and without penalty in case of an emergency. The focus should be on liquidity and safety rather than high returns.
∙ Stay disciplined
It is crucial to know what qualifies as an emergency — usually, unforeseen costs that impact one’s income or are urgent, such as a medical emergency or a leaky roof. Do not spend these funds on anything else other than an emergency. Maintaining discipline guarantees that your fund will be around when you need it.
An emergency fund is critical in the process of achieving financial freedom and stability. This way you are ready and shielded whenever emergencies occur in your lifetime. It is not about having cash in your pocket; it is about having the ability to live your life without stress or anxiety over money. Utilise a savings calculator and a sound savings plan to create your emergency fund and begin building a strong financial foundation now.
