Emergency Fund: Your Financial Safety Net | Spring Money

As the old saying goes, "Expect the unexpected." This is especially true when it comes to finances. No matter how carefully you plan, unexpected expenses can always pop up. Whether it's a medical emergency, a job loss, or a car breakdown, having an emergency fund can provide you with the financial security you need to weather the storm.

The past few years of the pandemic, specifically between 2020 and 2021 were extremely frightful for most of us. During this period people realized the importance of financial stability. The emergency funds are one major portion of it, that we realize under such disrupted situations only. In this blog, we'll discuss what an emergency fund is, why you need one, and how to create and save money for it.

What is an Emergency Fund?

An emergency fund is a pool of money that you set aside to cover unexpected expenses or financial emergencies. These emergencies can include medical bills, car repairs, job loss, or any urgent-money situations. The purpose of an emergency fund is to give you a financial cushion so that you don't have to seek help from friends and relatives or rely on credit cards or loans to cover these expenses.

Why do we need an Emergency Fund?

Having an emergency fund is essential for financial security. Here are a few reasons why:

• Protections from unexpected expenses: As mentioned earlier, unexpected expenses can pop up at any time. Having an emergency fund ensures that you have money set aside to cover these expenses without having to take on debt.

• Provides a safety net during a job loss: If you lose your job, having an emergency fund can help cover your living expenses until you find a new job.

• Helps avoid debt: Relying on credit cards or loans to cover unexpected expenses can lead to debt, which can be hard to pay off. An emergency fund can help you avoid this situation.

How much should the Emergency Fund be?

There could not be a fixed answer or rule for this, everyone’s emergency fund will depend on their individual circumstances. For example, if a car worth ₹5 lakhs, and a Mercedes S-class which costs around ₹1.5 crores have a similar reason for the breakdown, then do you think it would be possible to get both of them repaired at the same price? Obviously not. This is why emergency funds need to be created keeping in mind one’s personal lifestyle and expenses.

Although, the strategy that some experts suggest following is to have at least three to six months' worth of living expenses as your emergency fund. This means that if your monthly expenses are Rs. 50,000, you should aim to save between ₹1.5 lakhs to ₹3 lakhs in your emergency fund. Also, the term 'Monthly expenses' or 'Living expense' means basic or regular expences that could not be stopped like EMIs of loans, house rent, electricity bills, groceries, school and college fees of children, and other such expenses, which is more of a basic need and not a luxury like planning a trip or buying an expensive phone.

However, if you have dependents or you work in an industry with high job growth and stability, you should aim for a larger emergency fund.

How to Create an Emergency Fund?

Creating an emergency fund may seem daunting, but it's actually quite simple. Here's how you can get started:

Set a Goal: Decide how much you want to save for your emergency fund.

• Open a separate Account: Keep your emergency fund separate from your regular savings account. This will help you avoid dipping into it for non-emergency expenses.

• Start Saving: Set up automatic transfers from your checking account to your emergency fund account. Even if it's just a small amount each month, it will add up over time.

• Increase contributions as you can: Once you have established your emergency fund, aim to increase your contributions. Whenever you receive any bonus or earn any extra/secondary income you can consider transferring it into your emergency fund account.

• Review your emergency fund periodically and adjust as needed: As your income and expenses change over time, so does your emergency fund. So keep a check on your monthly expenses and other liabilities and make increase the amount for the emergency fund if required.

Conclusion

An emergency fund is a critical component of your financial security, yet many people don't have it. It provides you with financial support to cover unexpected expenses and helps you avoid debt. Moreover, it gives you peace of mind knowing that you're prepared for uncertainties. Always remember, An opportunity may or may not knock your door when you want, but emergencies occur when you least expect them. Hence, it's better to plan your emergency funds in advance rather than wait for any such incidents to teach you the importance of this fund.