What is the Best Timeline for Building an Emergency Fund?

Time Needed to Plan for an Emergency Fund

Different Ways to Speed Up Your Emergency Fund Savings

Calculation of Emergency Fund and Timeline

Emergency savings calculation is simple. You can follow some simple steps to determine the contingency fund savings and accordingly build a timeline.

Step 1: Determination of Total Income: The primary step of contingency savings calculations is adding up all your income from different sources. This can include different sources like rents, gifts, jobs, investment returns, etc.

Step 2: Calculating Your Monthly Expenses: Next, you can determine the monthly expenses on the essential and semi-essential items. This usually includes payment of electricity bills, food, rent, costs of travelling to your workplace, clothing and so on.

Step 3: Multiplying the Result by Six: After adding all the expenses, multiply the result by six. This will allow you to estimate the total money you will need to sustain without a regular inflow of cash. Accordingly, you can determine the timeline for building a contingency fund.

Step 4: Inclusion of Other Anticipated Expenses: You can also add up some anticipated one-time expenses while determining the total expenditure. This includes medical and vehicle repair expenses, electrical gadgets repair costs, insurance premiums, loan EMIs, etc.

Step 5: Determination of Monthly Savings: You can subtract the monthly expenses from your total income to determine the monthly savings. Apart from this, you also need to subtract the amount from the savings you plan to put in other accounts, like a rainy day fund.

Step 6: Deciding the Timeline for an Emergency Fund: Finally, you can divide the total contingency savings required by the amount you can contribute to this fund without making major lifestyle changes. This will give you an idea of how much you can contribute to your emergency account savings.

Here is an example of the calculation that will give you an idea regarding the timeline you would need to build an emergency fund and how many months of income an emergency fund should cover.

Let’s assume that your monthly income is ₹1 Lakh. There can be numerous expenses that you can have in a month. Some of the unavoidable ones include:

Expense Type

Expense Amount in ₹

Food

10,000

Travelling

5,000

Clothing

5,000

Rent

10,000

Utility bills

10,000

Total Amount

40,000

Apart from this, there are several other expenses that you might not need to pay monthly but are big-ticket and need to pay at regular intervals. These usually include:

Expense Type

Expense Amount in ₹

Vehicle repair costs

10,000

Minor medical expenses

10,000

Insurance Premiums

10,000

EMIs

10,000

Travelling

20,000

Total Amount

60,000

According to the above tables, the total requirement of the funds in your contingency account can be determined as follows:

Expenses

Formula

Amount in ₹

Monthly Expenses

40,000 X 6

2,40,000

One-time expenses

60,000 X 1

60,000

Total expenses

Monthly Expenses + One-time expenses

3,00,000

From the above values, you can quickly determine your monthly savings. From there, you can easily determine the time required to build them.

Expenses

Formula

Amount in ₹

Monthly savings (A)

1,00,000 – 40,000

60,000

Other savings account contribution (B)

10,000 X 1

10,000

Emergency Fund contribution

A – B

50,000

Hence, the time required to build an emergency fund is = 3,00,000/50,000 = 6 months.

We hope this blog answers your query about how many months you need to build an emergency fund. You should also note that it is imperative to secure your contributions while building the contingency fund. This will ensure an instant supply of sufficient money when facing a financial crisis.

FAQs About Timeline for Building Emergency Fund

How to secure contingency fund savings? up-arrow

Emergency savings act as a cushion when facing a financial crisis. So, ensuring its security is of utmost importance. For this, avoid parking this money in investments dependent on market sentiments. Instead, consider depositing them in accounts that can yield you stable returns.

Where can you park your emergency fund money? up-arrow

You can deposit your contingency fund money in a savings account with a sweep-in facility, debt mutual funds, and Short-term fixed deposits. These do not fluctuate with market sentiments and provide you with stable returns. Also, you can keep your emergency fund money as cash in your home.

How can you use your emergency fund money? up-arrow

You can use the emergency fund money to meet unplanned expenses like substantial medical costs, massive vehicle repair costs, etc. Also, it can protect you during job loss by providing you with sufficient funds to maintain your lifestyle for at least six months. In addition to this, you can use this money to serve a specific goal.

What are the advantages of building an emergency fund? up-arrow

You can instantly tap into your emergency account when you need money. This way, you can stay worry-free about the sudden appearance of extensive expenses. This also ensures that you will not have to turn to loans and pay EMIs to repay them when you do not have a stable income source.

Which factors can help you decide the amount you should keep in your emergency fund? up-arrow

Factors like monthly income and expenses, debts, stability of the economy, and job security are crucial factors you should consider while determining your emergency fund savings. Apart from this, you can also consider some unforeseen expenses and save extra to meet those needs.