Life is highly unpredictable and will throw you unexpected and unpleasant surprises every now and then. This is when it’s good to have an emergency fund. This is a safety net that can help you cover unexpected or unforeseen expenses without actually breaking your monthly budget or without having to take on expensive debt. An emergency fund is really just that, it’s money for an emergency. However, you need to think about it as an additional reserve of money separate from all your other long-term savings goals. General thumb rule suggests that you should be setting aside around 3 to 6 months of monthly expenses. Of course, more months the merrier, but it’s better to at least make a start with 3 to 6 months as your initial emergency savings goal.
Saving for an emergency fund may seem a daunting task, but taking the first step towards starting the process can help give you peace of mind, rest assured. To figure out how much you need for emergency expenses, you simply have to list out all your necessary monthly expenses. The list would generally include monthly rent, EMIs, utility bills, groceries, and other key expenses. Let’s assume that your total monthly expenses come to Rs. 25,000. All you have to do now is to multiply this with the number of months you would want to maintain as emergency funds to arrive at your emergency funds goal. Let’s assume your emergency funds goal is to maintain the amount for 3 months, which is a good goal for getting started. Thus, your total emergency funds requirement would be Rs. 75,000 (Rs. 25,000 x 3).
Now that you know your goal for emergency funds, it’s time for you to work out the time horizon to achieve the goal. For instance, if you want to reach the Rs. 75,000 three-month emergency funds goal in six months, then you will have start saving Rs. 12,500 right away for the next six months. This will enable you reach your emergency funds goal in 6 months. In case, 6 months is too short a time horizon, you can plan to accumulate the funds in 12 months, which means you’d have to start investing Rs. 6,250 every month right away to form your emergency corpus of Rs. 75,000 in 12 months. Please note that the lesser the time horizon for you to form your emergency corpus the better, since emergency can strike anytime. That said, there’s nothing better than making a good start to your emergency funds goals and it’s better to start now than never.
The best part about savings for your emergency funds goal is that you can always reassess in the future to speed up your savings to build the corpus faster. Remember, if you look at your bank statement to analyse where you spend your money, you’d be surprised to see how much excess money you’d have spent on items such as unnecessary eat-outs, pizzas, coffees, and private cabs. For instance, analysis of your first month’s statement after starting your emergency funds goal tells you that you spent Rs. 2,500 on some of the above unwanted items. Simply remind yourself of your long-term goals such as your dream home, children’s education, smooth retired life, and cover for emergencies. You will understand that your goals will automatically outweigh your unwanted expenses. Now, this savings of Rs. 2,500 adds to your accumulation for emergency fund goal. Thus, you can now save Rs. 8,750 (Rs. 6,250 + Rs. 2,500) per month, which means you can achieve your emergency funds goal in lesser time of around 8 odd months. Likewise, if you keep on analysing your monthly bank statement, you might be surprised to find sufficient room for additional savings, which would speed up your emergency fund accumulation process.
Thus, finding additional ways of savings such as avoiding credit card spending, controlling watching movies and live concerts, stopping spending on video games, and reducing your discretionary spend to as minimum as possible would be much easier.
So, where do you save the money to build your emergency fund. You could either earmark these funds in your existing bank account or invest the money in ultra short-term liquid funds with high debt exposure. This will not only keep your emergency funds separate from your long-term savings, but will also make your money grow faster. These debt funds are as safe as money on your bank account and provide you with higher returns than a bank account.
Moreover, you can open a new savings bank account dedicated to the emergency funds. A new savings account would enable you to easily maneuver your funds and analyse your account to achieve your emergency fund goal swiftly. The danger of expending the corpus accumulated in the emergency funds for non-emergency events vanishes, since you would not be touching this savings account for your daily expenses. Therefore, you wouldn’t dip into these funds.
Irrespective of the method you choose to save for emergency funds, all that matters is how much and how fast you’ve accumulated the required corpus to cover you for emergencies or contingencies. Emergencies never beckon and strike, they just raise their ugly hood often catching you unware, leaving you and your family in utter distress. Therefore, having a cover for emergencies and unforeseen contingencies in the form of emergency funds will not only help you gain peace of mind, but will also help you save effectively for all your big dreams of life. Therefore, next time you need funds in an emergency, promise yourself that you will not dip into your actual savings for the long-term. Plan to have an emergency fund today for enjoying a secure and happy tomorrow.
Please Note: The numeric examples given in this article are imaginary just to make you understand the purpose of saving for emergency funds and how you could do it effectively.
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