How to build an emergency fund?

How to build an Emergency Fund

Medical Emergency Fund

The way seatbelts protect you during accidents, an emergency fund protects you during unforeseen times like loss of job, medical emergencies, or unexpected expenses. 

What is an emergency fund?  

An emergency fund is money that you should put aside to cover at least 3-6 months of your monthly living expenses. It’s like a safety net which you can always fall back on. 

How to build an emergency fund?  

Your future self will thank you for starting early. Start building your emergency fund today in these 5 simple steps!  

1. Evaluate how much money you would need

Since an emergency fund is roughly 3-6 months of your living expenses, it is important to understand how much you’re spending monthly on essential items like your rent, groceries, and utility bills.   

For example, if you’re currently spending 25,000 each month, the best practice is to build an emergency fund of 75,000 or more.

Also, doing this activity will give you an insight into your spending habits. And it is a great opportunity for you to cut down on your excessive spending.

2. Choose where you save money

After deciding the total amount of money you need to build your emergency fund, it’s time to decide where you save this money. The best practice is to choose an investment that is stable, easily accessible, has high returns, and is safe from market fluctuations.  

Usually, people open a savings account with less fees and a good interest rate. You can also explore some other investment options like short-term fixed deposits and liquid mutual fund.

3. Set a target for yourself

Setting a target amount and date by which you want to build your emergency fund will help you speed up the process.  

When setting the target, consider factors like your monthly income, expenses, and savings.  

The earlier you start, the more time you will have to achieve your target. This could take 3 months, 6 months or even a year based on your goal.

4. Start saving every month

Put aside a fixed amount of your total income towards your emergency fund and do this every month.  

For example, if you have to save an amount of Rs 3 lakhs and have given yourself a target of 9 months, start putting aside Rs 33,000 every month.  

This will help you reach your target on time.  

5. Create a separate bank account

Creating a separate savings account which is only dedicated to your emergency fund is one way of controlling the urge to spend that extra money.

You can go a step further and set up an auto-debit feature on your primary account. This will make sure you are putting money into your emergency fund, every month.

The best practice is to set the auto-debit date close to the day you receive your income, helping you avoid any kind of overspending.   

In Conclusion 

Do you think using an emergency fund for an emergency Goa trip sounds like a wise decision? Don’t ever make that mistake. 

An emergency fund is only supposed to be used in the times of crisis and should be used only when you really need to.  

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