Build a Strong Emergency Fund

What is an Emergency Fund?

Simply put, it is your go-to corpus in case of emergency needs. You must set aside that pool of money for all kinds of uncertainties. This can include medical expenses, legal charges, sudden house repairs, job loss, etc. It would be best if you refrained from dipping into such a fund for ordinary or routine expenses. If at all you do, try replenishing it as soon as possible.

Characteristics of a Strong Emergency Fund

1. Sufficient

Your fund must be adequate to keep you stress-free without any income. It should be able to withstand unexpected financial blows. For example, if a medical emergency strikes and you become incapable of working for some time, you should be able to take a break without any financial worries. Ideally, your emergency fund must have enough to support you for six months.

2. Liquid and Accessible

Your fund should be easily accessible so you can quickly have the money to tackle the emergency.

How to Build an Emergency Fund?

Building an emergency fund is simple. Here’s what you need to do:

Step 1

Create a budget and write down your monthly income and expenses.

Step 2

Multiply your monthly expenses by 6. The number you get is the minimum amount your fund must have at all times. For example, if you expend Rs 40,000 monthly, your emergency fund must be at least worth Rs 2.4 lakh.

Step 3

Figure out how much of your monthly income you can allocate to your emergency fund every month. Review your expenses and check if there is any scope for cutting down on certain costs. For example, you may do away with multiple OTT platform subscriptions and instead subscribe to one for your entertainment needs.

Say your income from all sources is Rs 80,000 per month, and your corresponding expenses are Rs 40,000. So, ask yourself how much you can save for unforeseen situations. Let’s say you cut down a few expenses and manage to save Rs 4000 every month, and you are okay with setting aside Rs 6000 from your disposal income. Thus, you can easily set aside Rs 10,000 every month. You should continue investing in your emergency fund till reaching your investment goals.

Step 4

Invest the sum that you saved for emergencies. Only keeping the money at home won’t help it grow. So, investing your money in avenues that can add to your savings will be wise. This will help you build your fund faster.

(The method and quant may not be applicable for all. Consult Experts/Advisors to help you plan for your emergencies)

Where to Invest to Build an Emergency Fund?

You can consider investing in Overnight Funds to expedite building your emergency fund. They are open-ended Debt Funds that invest in securities having a maturity of one business day. Such funds are highly liquid and accessible. Generally, all redemption requests are processed within one business day. Thus, it may be wise to opt for Overnight Funds for building your emergency corpus gradually.

To sum it up

It is rightly said that preparation is half the battle won. Hence, prioritize creating an emergency fund to overcome financial challenges easily.