Having an emergency fund is key for anyone trying to maintain financial stability. It allows you to avoid debt even in the face of unexpected expenses, be it medical bills, car issues, or home repairs. But how much should be ideally allocated towards an emergency fund? Saving for emergencies is highly subjective and mostly depends on personal and lifestyle factors. In this article, we will highlight key saving strategies while also detailing the importance of maintaining an emergency fund.
Why Is an Emergency Fund Important?
Having an emergency fund is simply a way to cushion oneself from the unexpected shocks that life throws. Here, we highlight core reasons why emergency funds should be prioritized above everything else.
- Maintains Stability:
Irrespective of your earning status, losing a job calls for unexpected expenses, ranging from medical costs to rent. Relying only on traditional forms of financing during such times may seem like the easiest option to get over them. This, however, will only lead to debt accumulation in the end. An emergency fund not only makes these shocks manageable but also stops one from relying on credit cards. - Get to Work:
Having a savings account with some funds helps you when you need finances urgently. In the event of an unexpected situation, you will always be financially prepared. This preparedness alone provides you with a great deal of comfort, and you can use money stress in lifestyle improvements rather than worrying about debts. - No Debt:
Using credit cards and other loans to cover unexpected expenses is common among many people. But even if they pay off the dues eventually, the skyrocketing APR is an enormous issue. These kinds of expenses can be covered using an emergency fund, thus removing the need to take any loans.
What Is The Proper Amount to Keep in an Emergency Fund?
Your financial status is only one of the marking factors in the amount you will need to put in your emergency fund. Typically, we suggest saving enough money to cover three to six months of basic needs. Now let’s analyze that further.
1. Basic Benchmark: 3-6 Months of Needs in Your Country
- If the net sum of expenses that you require every month is reasonable, you are employed, and living in a country with a reasonable standard of living, a three months’ expense ceiling may even suffice.
- For self-employed individuals or those working in volatile industries, saving around six months’ worth of expenses is highly advisable. Additionally, those living in places with a high cost of living might want to consider it too.
- Establish your monthly expenses first, which should include things like:
- Rent
- Insurance costs
- Groceries
- Utilities
- Transportation
- Any other basic living expenses you might have.
- Once you have a ballpark estimate, multiply the amount by three or six. The specific multiplier depends on your individual circumstances.
2. Personal Factors Come Into Play
- Employment Certainty: If your industry is stable, the amount of money saved does not have to be much. On the other hand, if you work in a gig economy, then it is suggested to save more.
- Family Obligations: This also serves as an area of peace of mind. If you have children or major family obligations, a larger fund is a definite plus.
- Personal Health: If you have an unfortunate medical condition or other health issues, it is wise to save more than usual.
- Living Costs: The amount of money you have to save is also affected by how much you spend on living. If you are located in an area with expensive cities or high home maintenance costs, saving for six months or more can prove beneficial.
3. Additional Considerations
While the three to six month guideline offers individuals a solid basis, consider the possibility of obtaining additional pecuniary particularities:
- Variable Income: Freelancers and seasonally employed people sometimes have income that varies greatly. As such, additional savings might need to be set aside for future, less fruitful months.
- Debt: Those with large, outstanding debt need to strike a balance between building their emergency fund and paying off high-interest debt. Always pay off the debt first before saving for these funds.
How to Set Up an Emergency Fund?
- How much savings do you need to achieve in order to set up an emergency fund? Identify how much you spend annually and at least save three months of expenses.
- If your expenses are ₹2,50,000, aim to set an emergency fund of at least ₹7,50,000. This will give you the peace of mind that comes from having a safety net in case of a financial emergency.
- In order to avoid spending your emergency savings on non-emergency expenses, set the emergency fund aside in a separate high-yield savings account. This also gives you the benefits of earning interest while keeping your funds saved separately from your day-to-day spending account.
- If it’s a hassle to manually transfer money every month, then schedule automated monthly transfers to your emergency fund. This way, you can be at peace knowing that you’re saving funds every month, without any hassle attached to it.
- Setting your savings goals low initially can help greatly, as it allows you to gradually build towards a larger saving target. Aim to cement the habit by starting with a goal to save ₹50,000, then raise your target to ₹1,00,000 before gradually increasing it further.
- You can target some areas of your spending that would allow you to cut back, for example:
- Eating out less
- Canceling unused subscriptions
- Doing less impulse spending
- Reallocating those funds towards your emergency fund.
Reviewing your monthly budget gives you an idea of how and where to spend less and save more.
Conclusion
Emergencies are unpredictable, so building an emergency fund for your expenses is one of the greatest financial decisions anyone can make. It acts as a form of protection, so debts are avoided, and stress is mitigated. Not everyone has the same needs, but aiming for 3 to 6 months’ worth of savings is a marvelous start. First, establish the goals you want to achieve and then set your expenses on automatic. Doing this will allow your emergency fund to grow in the background until it can be utilized. It is recommended to take action now, so be prepared for anything life can throw at you.
