A high-yield savings account will be the most suitable investment for your emergency funds. In this type of bank account, not only are your funds easily accessible, but you can also earn some interest on your deposits.
An Essential Guide to Building Emergency Savings Fund
The coronavirus outbreak has taught us that building an emergency fund is a necessity nowadays. It prevents you from being a shock absorber when emergency expenses strike. Moreover, it prepares you to handle the bills when going through any financial crunch or unplanned scenarios.
As emergencies cannot be avoided, having some emergency funds can save you from dealing with these unpredictable events. Read on to learn more about emergency savings funds.
What Is an Emergency Fund?
Where Should You Use Your Emergency Fund?
You should invest in an emergency fund only in unexpected, unforeseen emergencies. However, it should never be a part of your routine monthly expenses or long-term savings plan for any vacation or a new car. It should only be tapped to protect yourself from derailing financial stability at any medical bill payment time.
But not every unexpected expense is an emergency one, so one must set some guidelines for them to avoid relying on any credit form that can turn into debt in future.
What Is an Important Requirement for an Emergency Saving Fund?
There is no such important requirement for an emergency saving fund. But investors should plan beforehand how much to save for an emergency fund. One should invest the amount in an emergency fund based on family size, existing debt, monthly income, the standard of living, etc.
Most financial experts suggest that their recommended emergency fund amount should be a minimum of three to six months’ worth of their household expenses. Apart from this, it should be specifically designed to meet individuals’ unanticipated financial shortfalls as per their past situations.
What Is the Best Way to Save an Emergency Fund?
Once the emergency savings fund is accumulated, one should not entirely keep it in a bank account or in liquidity form. Here are some steps to save money for your emergency fund:
Step 1: Break down your savings into more minor counts
Step 2: Open a separate emergency savings account
Step 3: Automate the deposits in your savings account
Step 4: Look for different ways to cut expenses and boost your income
Step 5: Review your budget regularly
Though these are some of the most suitable ways, yet the best option for emergency fund savings is to spread it across short-term RDs, liquid funds and debt mutual funds. This will help you in earning decent returns without compromising liquidity.
What Are the Tips for Building an Emergency Fund?
Building an emergency fund takes time; it cannot be built overnight but gradually. It also needs discipline, time and some strategies to manage your cash flow effectively and build an emergency fund.
Here are some of the most valuable tips that work best for you:
- Set Specific Saving Goals: One of the most vital tips for emergency funds saving is to set specific savings goals you need to achieve within a target date. This will help you to keep track of your savings based on your income and the amount you invest. The earlier one starts, the easier it will be to collect the required funds for an emergency.
- Allocate Some Existing Amount to Your Emergency Fund: There might be some extra cash in your savings account or some fixed deposit amount with no specified goals that you can efficiently channel for your emergency fund. You can create a separate account for accumulating the extra money as capital for your emergency savings fund. You can even set an auto-debit feature in your salary account so that a certain amount is transferred to your emergency fund from time to time. Another way to save is to set aside your income tax refunds, bonus amounts, etc., and channel this into your emergency fund.
- Don’t Increase Your Monthly Spending: Stay away from temptations and the desire to spend like a creep. Take hold back from all sorts of unnecessary investments and spending. If you have a habit of monthly spending, then you are not saving at all! Also, don’t open any new credit cards to satisfy your shopping urge, as it might put you in debt in future.
- Look for Ways to Boost Your Income: Another popular emergency fund tips that will help you out is to boost your income. It can be through any side hustle, freelancing, selling your items, or other ways. You can also cut your costs to boost your income by using public transportation more often, eating at home, asking for a reduced interest rate from your credit card provider, and so on.
You can save more for your emergency savings fund if you have more income.
Thus, the above-stated information will benefit prospective users who want to know how to save money for an emergency fund.
FAQs about Building Emergency Savings Funds
The amount to put in an emergency fund varies from person to person because everyone’s financial situation is different. So, a 3-month, 6-month or 12-month emergency fund is suitable for most problems.
A liquid mutual fund is an excellent choice for an emergency fund because of its low risk and quick redemption of investment.
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