If you are living without any safety, then you are living on the financial edge and might run into a crisis. But if you are prepared with emergency funds, it provides you with the confidence that you can tackle any unexpected moment of your life without worrying about money.
Emergency Fund: Why, How and Where to Keep It?
During the Covid-19 pandemic situation, many people experience unforeseen circumstances in their lives, like a job loss or salary cut. This is one situation of many that made people realise how important it is to save emergency fund to overcome these critical situations with relative ease.
Also, saving emergency corpus prepares you for tackling various unannounced monetary problems or difficulties and also helps deal with financial ups and downs.
What Is an Emergency Fund?
An emergency fund is simply the go-to corpus that one sets aside for all kinds of emergency situations and uncertainties. This might include emergency medical expenses, job loss, sudden house repairs, legal charges, etc. It gives you peace of mind in unexpected financial emergencies.
As it is specifically kept for unforeseen situations, one must refrain from tapping into such funds for routine or ordinary expenses.
Why Emergency Fund Is Important?
Without emergency savings, even a minor financial setback can turn into a potential debt. Even those who have considerably fewer savings often have to rely on loans and credit cards in times of financial emergency, which could lead them to debt in future.
This is why it is important to keep some emergency funds as it creates a financial buffer for you so that at the time of unanticipated situations, you can avoid borrowing from someone and don’t have to rely on credit cards or high-interest loans.
How Much Emergency Fund Should Have?
According to the financial thumb rule, the emergency money that you will be saving should be worth enough to cover three to six months of living expenses.
But again, it depends upon the individual’s financial situation and thus varies from person to person. Individuals who want to know how to start an emergency fund can begin by setting a small attainable amount as their goal that they can afford to save.
Where to Keep an Emergency Fund?
Where to park your emergency funds completely depends upon your situation, but refrain from keeping it in your cupboard or under your bed. You must keep this fund in an easily accessible and safe place where you don’t feel tempted to spend it on routine or non-emergency situations.
Here are a few options amongst which you can opt for the most suitable ones:
- High-Yielding Savings Account: You can save your emergency fund in a high-yielding savings account. These are different from a traditional savings account as it offers higher interest rates and these accounts are not easier to access. It typically required the transferring of the money to a checking account for utilising the funds.
- Money Market Account: Another place where you can save is a money market account. These accounts are far easier to access, and some even come with a debit card and checks. Only limitation is that these accounts allow a limited number of withdrawals per month and requires a higher minimum balance requirement in comparison to a traditional savings account.
- Traditional Bank Account: This is one of the most commonly used accounts for saving emergency funds. Though this account does not offer you that much interest due to its convenience and easy accessibility, it is being used ideally by most.
How to Save Money for an Emergency Fund?
In order to know how to build emergency fund, you need to implement different strategies. Some of the easiest ones are listed below:
Make Your Own Budget and Try to Live by It: It is important to create your monthly budget, which includes all your monthly income and expenses. By creating a budget, you will get an approximate idea of how much you should spend and how much you will be saving at the end of the month. If you try to live by your estimated budget, you will be able to save a certain amount of funds in an emergency.
Set a Monthly Savings Goal: Establishing an emergency fund requires savings on a consistent basis. One can easily set a target of monthly savings and set aside a certain amount of cash for savings. These savings should consistently increase with the increase in income and decrease in expenses.
Manage Your Cash Flow Effectively: Always track your expenses from time to time. This will help manage your cash flow and restrict you from spending more than your income.
Apart from these, there are other ways to save money for your emergency fund. Like, as opening another bank account and setting aside some money or auto-debiting some cash directly to this account.
How to Use an Emergency Fund?
Whenever a sudden financial expense pops up, you might feel the need to spend your emergency fund. But before tapping into emergency savings, ask yourself whether it is necessary, unexpected and requires urgent paying.
If you get an answer of yes, then proceed to invest your fund in the existing circumstances. Some dire circumstances that essentially need an emergency fund are:
- In case you lose your source of income suddenly, and you don’t have enough money in hand to cover your living expenses.
- In case of any sort of family emergency
- In case of an emergency home repairs
- In case of any unexpected medical emergency.
Thus, having an emergency fund restricts you from relying on any other form of high-interest loans or credits at the time of financial shock, which might put you in debt in future. So, build your emergency fund wisely and redeem it only in times of uncertainty.
FAQs About Emergency Fund
Instead of a bank, an emergency fund can be kept at:
- Higher-yielding money market accounts
- Credit unions
- High-yield checking accounts
- Peer-to-peer (P2P) lending services.
A rainy day fund is usually smaller than an emergency fund and is most commonly used for unexpected, one-time, small amounts. While an emergency fund has comparatively more money involved in it and is being used for more emergency purposes like medical expenses, etc.
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