Life is a series of unplanned and unexpected events and very often the solution lies in having sufficient finances. You can prepare for financial emergencies by building yourself a safety net — an Emergency Fund. An Emergency Fund is money that you consciously set aside for a situation where you need money unexpectedly. It could be due to a sudden loss of income or a health issue that your insurance would not cover or a breakdown of your car or a house repair that was completely sudden. An emergency fund is typically around 3 – 6 months of living expenses.
Hacks to build a robust Emergency Fund —
The amount of money you need to have in your Emergency Fund depends on the stability of your income. If you are a freelancer, your fund should have at least 6 months’ worth of expenses because your income is variable and would depend on the number of clients you have. On the other hand, if you are an experienced salaried professional, 3 months’ worth of expenses may be enough.
If you have insurance coverage, you may be able to tap into that for medical emergencies or car damage and so maintain a smaller emergency fund. Without insurance, it would make sense to put away more money into your emergency fund.
Your age would also determine how much you set aside. As a youngster in your 20s and 30s, you would not expect to have many medical issues but if you are nearing your retirement, it would make sense to plan for unexpected hospitalization or other medical emergencies for you and your family. Therefore, as you grow older, increase the amount in your emergency fund.
Another factor that would determine how much money you keep aside would be other sources of income. If you collect rent for a house you have let out or get additional income from a dividend or agricultural income from a farm, you can have a smaller emergency fund.
An emergency, in this context, is a situation where you need money to do what is necessary. For example, an unplanned medical expense or car accident or if you need to take time off from work because you have injured yourself, would be an emergency. This would be a valid reason to access your Emergency Fund. Expenses that would not justify breaking into your fund would be to buy a new TV because there is a great discount on it or to change the flooring of your bedroom from vitrified tiles to wood floor. These things can be budgeted for; you should not pay for them from your Emergency Funds.
Based on your earnings, decide how much you can afford to set aside towards your emergency fund. You can save a fixed percentage of your income every month until you meet your target amount. Cutting down on unnecessary expenses, like the gym membership you never used or eating out very often, can also help you save money each month. Another good idea would be to deposit your reimbursed bills or any bonuses into your fund account. There are many creative ways to save money, such as saving on utilities, recycling and selling unused furniture items and appliances.
You can choose to achieve your target amount in your emergency fund aggressively by putting away every extra rupee you have or you can do so gradually by saving a small percentage every month or two till you reach 3-6 months’ worth of expenses.
It’s a good idea not to let your funds be idle in the bank. There are several options available to enable your money to earn interest, yet be available for withdrawal. There are short term Fixed Deposits as well as Mutual Funds that allow quick access to your money and earn interest too.
Recurring Deposits with 6 months to 3 years maturity would also make sense for your emergency fund. Liquid SIPs (Systematic Investment Plans) with no lock-in period are a good option for parking your emergency funds too.
Some people find it easier to manage their emergency funds if they deposit it in a different bank or savings account from the one they spend from.
No matter which saving method you choose, remember to keep checking on your emergency fund from time to time and replenish it, in case you have borrowed from it. For a few months, you can forgo one major monthly expense like watching movies in a Cineplex or a cable TV subscription until your fund is back to the original amount.
A planned Emergency Fund may not solve all your money problems, but it is a great start to a strong, personal financial plan. It would reduce your dependence on loans and other borrowing options that create stress that you can do without. A friendly advisor at OneNDF can help you plan your finances and build your Emergency Fund today. OneNDF brings you a unique Online Video Consultation Platform that will enable you to have direct access to bank officers/ consultants engaged in devising a borrowing strategy customized just for you.
If you are looking for any assistance or queries with regards to financial decisions, feel free to connect with us at 7810844844 or email us at firstname.lastname@example.org.