Having an emergency fund is crucial for financial stability. Life is unpredictable and expenses can arise suddenly. Events like job loss, accidents, illnesses, etc., are often unanticipated and can leave you scrambling to pay for necessities if you don’t have savings set aside. An emergency fund covers you during periods of income loss or unforeseen costs. It prevents you from racking up high-interest debt or liquidating investments prematurely. Here are some essential stages for effectively building an emergency fund.
- Calculate how much you need
Decide how much you need in your emergency fund. A common guideline is to save a minimum of six months’ worth of living expenses. Calculate your average monthly spending on essentials like housing, food, utilities, transport, etc. Multiply this by six to arrive at your goal amount.
Keep in mind your specific situation. Do you have a stable job or income source? Are you insured against health crises and disabilities? Do you have other assets to fall back on? Your required emergency savings may be lower or higher. Make sure to factor in emergency costs like medical bills too.
As a start, even ₹10,000 to ₹15,000 in savings will help withstand temporary setbacks. Build up to larger amounts over time. Review and adjust your target every few years as expenses change. The goal is to have enough set aside to cover necessities if your income stops.
- Pick the right avenue to park your funds
Liquidity is the priority when it comes to picking an investment avenue to park and build your emergency fund. Quick and easy accessibility to your emergency fund is more important than returns here.
Many use a regular savings account for their emergency fund. But short-term debt mutual fund schemes like liquid mutual funds can give higher returns without compromising ease of access. Just ensure you can withdraw quickly at any time.
- Automate savings
The easiest way to build up an emergency fund is to automate periodic contributions. Set up automatic transfers from your regular bank account to the emergency fund account. Transfer a fixed amount each month.
Online banking and apps make this very simple nowadays. You can schedule monthly or weekly transfers in advance. This automated savings takes the effort out of consciously setting aside money every month.
Start small if needed – even ₹1,000 monthly builds up over time. Route windfalls like bonuses and gifts directly into savings too. Consistent automated deposits ensure your emergency fund keeps growing.
- Cut expenses where possible
Building savings requires spending less than you earn. Look for expenses to trim to find money to contribute to your emergency fund each month.
Categories like food, transport, and shopping offer the most potential for cuts. Avoid eating out and packaged foods. Use public transport instead of cabs. Subscriptions, gadgets, etc., are some other areas ripe for trimming excess.
That said, don’t deprive yourself too much. Moderation is key. For instance, learning to cook your favorite restaurant dishes at home can be a more sustainable strategy than quitting them completely. The goal is to find intentional cuts that don’t impact your quality of life too much.
- Pay off high-interest debt
High-interest debt works against savings. Credit card debt especially can take up large portions of income, leaving little leftover to save. If you carry balances monthly, focus on paying them down first before building your emergency savings.
Debt repayment should take priority over savings because credit debt grows. The months of expenses you could save go into paying mounting interest instead. Pay off loans smartly – highest interest first, minimums on others. Once you are debt-free, redirect those funds to build your emergency savings.
Build the habit of building an emergency fund
Regularly contributing to an emergency fund involves forming a new habit. Start by automating a small amount monthly, even if it doesn’t meet your goal savings yet. This gets you in the rhythm of regular transfers without feeling deprived.
Slowly increase contributions as your savings build. Celebrate milestone amounts. For instance, treat yourself to something nice after reaching ₹50,000. This positive reinforcement helps cement the savings habit further. Over time, you may not even miss the money going into emergency savings.
The key here is consistency. Keep working toward bigger monthly contributions. But don’t stop the transfers if you can’t meet your target – something is better than nothing. Stay focused on the end goal of achieving financial stability.