Uncertainties in life never come with any warning. Be it a minor illness or sudden loss of job, all these first affect your pocket. At such a time, if you have a fixed amount secured as an emergency fund, then you can easily get out of these difficulties without taking a loan. This is the reason why in today's time emergency fund should be an integral part of every person's financial plan.
In such situations, there is a need for an emergency fund so that our household expenses can be met until the situation gets back on track. In this article, we will know what is an emergency fund, why it is important, how much should it be and how and where to keep it so that you are financially prepared in every situation.
What is a Emergency Fund?
Life is full of instability. Sometimes you may lose your job suddenly, sometimes a serious illness may come home or there may be a need for vehicle repair, a major expense at home or a family emergency. At such a time, if you have a safe amount deposited, which you can use immediately, then you can come out of that situation without any borrowing, loan or stress. This amount is called emergency fund.
Why Should You Create An Emergency Fund
An emergency fund has many benefits. If you suddenly need money, you will not have to beg in front of anyone. You will not have any debt burden. On the other hand, if you do not have an emergency fund, you will have to take a loan even if you do not want to. In this situation, you will neither be able to save money nor invest it.
How Much Should The Emergency Fund
First of all, you have to calculate how much your monthly expenses are. In this, along with rent, ration and medicines, other necessary expenses should also be added. If monthly installments like EMI are also going on, then add that to the calculation as well. Then multiply it by 12 and this will be the amount of your emergency fund.
For example, if your total monthly expenditure is 50 thousand rupees, then your emergency fund should be at least 6 lakh rupees. When this emergency fund is ready, then only spend money on other things.
How To Create An Emergency Fund
An emergency fund is not created at once, but it is created gradually through regular savings.
- For this, first make a list of your monthly expenses to know how many expenses you have to cover.
- After this, set a target based on that expense as to how many months' fund to create.
- Then start keeping a fixed amount aside as savings every month. This amount can also be small, like ₹2000-₹5000 per month.
- You can also add your salary bonus, tax refund, or other additional income directly to this fund. If you control some non-essential expenses, you can create this fund quickly.
Note: You should save 30 percent of your income. Invest 15 percent of it, keep the remaining 15 percent for the emergency fund. Remember, use the emergency fund only in emergency situations. Like you lost your job or your medical expenses became very high.
Where Should The Emergency Fund Be Kept?
The meaning of emergency fund is that you have saved this money for sudden problems. Therefore, keep this fund in such a place where the interest may be less, but the money can be available without any hassle at the time of need. You can make an FD of the emergency fund amount or keep it in a separate savings account or you can also invest in a Liquid Mutual Fund. There is no penalty for breaking the liquid fund.
Conclusion
If you start saving a little bit from today, then in a few months you can create a strong financial security cover. This not only makes you self-reliant but also gives you confidence to move forward. So, if you want to start financial planning, first start by building a strong and adequate emergency fund. If you have any question regarding this post, then you can tell us by commenting in the comment box given below. Your feedback and suggestions are welcome as always. Thank you.
