Financial stability is critical to keeping our peace of mind during life’s uncertain path. The emergency savings fund plays an important role in ensuring stability. This fund serves as a financial cushion, protecting you from unexpected financial shocks such as a medical emergency, job loss, or house maintenance. An emergency savings fund is especially important in India, as the bulk of the population is self-employed or works on a seasonal basis. It not only gives financial stability but also minimises the need for loans and indebtedness. So, let’s go deeper into why you need an emergency savings fund and how to construct one efficiently.
Why do you need an emergency savings fund?
- Unanticipated medical expenses
Healthcare spending is growing fast. Even though you have the best health insurance policy, there may still be medical emergencies that are not covered by the policy, which includes certain treatments, procedures or even some medications. An emergency fund may be a valuable resource in such cases because you can use it to cover unexpected costs and get any urgent care without any delay.
- Job loss
The Indian economy, like any other, goes through cycles of expansion and contraction. These economic fluctuations are likely to produce situations of unemployment or job losses. An emergency fund can be a financial cushion during hard times, and it helps you pay your daily expenses and bills until you get a new job.
- Unexpected home or vehicle repairs
Life is full of surprises, including unpleasant ones like sudden breakdowns of home appliances or vehicles. Such breakdowns often come with hefty repair costs that can disrupt your monthly budget. An emergency fund may help you deal with such unexpected expenses, which in turn prevent you from touching your normal savings or borrowing loans.
- Education expenses
Education is a big investment, and often, there can be unanticipated miscellaneous costs that come with it like extra course materials, unexpected fees, and international trips. An emergency fund will help you solve these unexpected expenses without overdrawing your normal budget.
- Debt prevention
Emergencies are usually associated with unforeseen expenses. Without an emergency fund, you may need to borrow, which may pull you towards debt. An emergency fund is a readily available source of money to cover unexpected expenses, which saves you from this situation.
- Retirement backup
The retirement funds are supposed to cover the regular expenses and to achieve a comfortable life in retirement. However, unplanned expenses can easily eat up the savings in one go. The emergency fund acts as the safety net for retired individuals which helps you to deal with such situations without disturbing your retirement corpus.
- Financial independence
An emergency fund is the first step towards financial independence. It gives you the freedom to make financial decisions without the constraint of financial emergencies. You do not need to take out loans or borrow money from others to cater for emergency needs.
- Mental peace
Knowing that you have a financial safety net in the form of an emergency fund brings mental peace. It assures you that you’re prepared to handle financial emergencies without affecting your standard of living or long-term financial goals.
- Coping with economic instability
During economic depression and inflation, prices rise, and income might not. An emergency fund can keep you afloat during such times and help you avoid taking out loans or using your credit card for regular expenses.
- Managing seasonal work
For those who do seasonal work, there could be periods in the year with no income. An emergency fund can help manage expenses during these off-season periods, allowing one to concentrate on the preparation for the next season and not be bothered by financial matters.
How to build an emergency savings fund?
- Set a goal
The first stage in creating an emergency savings fund is to work out how much you need to save. The amount should be sufficient to pay for at least six months of your living expenses. An online savings calculator is a prudent tool for this stage. You can type in your monthly income, regular expenses, and the type of life you lead into the calculator. Once done, the online calculator will give an estimate of how much you should save. This target setting is an important step which gives you a clear purpose to achieve.
- Start small
The following step after you have set a goal is to start saving. You do not have to set aside a fortune in a single day. Begin with a small amount that you can afford to set aside after you have paid all your bills. Regularity is the key here. For example, if you put aside Rs. Rs. 500 a week, in a year you would have saved Rs. 26000. As time passes, this modest amount will add up to a significant emergency fund.
- Automate your savings
Regularity in your savings can be ensured by scheduling automatic transfers from your salary account to your savings account every month. This approach, which is also known as ‘paying yourself first’, helps to ensure that a part of your income is automatically transferred into savings, therefore reducing the temptation to spend.
- Diversify your investments
While developing your emergency fund, you can also expand it by investing in different instruments. Fixed deposits and mutual funds are the most common investment tools in India. They not only safeguard your money but also allow you to grow your funds over time. Nevertheless, do not forget that your risk tolerance and investment horizon will determine the best investment option for you to choose.
- Keep it accessible
Emergency funds should be kept in a place where they can be easily reached in dire situations. Thus, it should preferably be kept in a liquid form. Savings accounts or cash-oriented mutual funds are good choices because of their liquidity and minimal risk.
- Reduce unnecessary expenses
One more efficient method to create your emergency fund is by reducing your extra spending. These may involve frequent dining out, costly subscriptions, or impulsive buying. Saving from these expenses can be invested into your emergency savings, which will speed up the process of reaching your goal.
- Regular review
Creating emergency savings requires ongoing effort. It must be reviewed and adjusted frequently. Make sure your savings plan still aligns with your goals and current financial status by reviewing it regularly. You may be able to save more money if you receive a raise or pay off debt. Likewise, you may need to modify the amount saved if you encounter financial troubles. Maintaining the efficacy of your savings strategy is ensured by routine evaluation.
Ending note
In summary, having an emergency savings account is a need rather than a luxury. It is a crucial component of your financial strategy that gives you freedom and financial stability. Remember, it is never too early or too late to start building your emergency savings fund. So, take the first step towards financial stability today, because it is better to be safe than sorry!
