An emergency fund is a savings account that you set up to cover unexpected costs or any emergency need. An emergency fund is important because it helps you cover any unexpected costs. If you have an emergency fund, you can avoid borrowing money or using credit cards to cover costs.
It’s important to have an emergency fund because you never know what situation will cost you money. An emergency fund can also help you build your credit score. Having an emergency fund will show lenders that you are capable of managing your finances responsibly.
Below are the steps to follow while planning to save for any emergency need
How much to save?
It is very important to plan how much money we should save for emergencies. One should have at least the amount needed to survive 6 months by spending on basic needs. For salaried professionals, a salary equivalent to 6 months’ expenses would be a good amount for an emergency fund. Apart from having businesses, cars, health-related expenses, etc., you will need to raise your emergency fund by saving separately on a regular basis.
Where to save?
Saving funds for emergency purposes is very important, and so is deciding where to invest. Since the savings will be made for any urgent or unexpected need, the first thing you need to check is the liquidity. How quickly can funds be converted into cash? If you have invested anywhere, you should be able to withdraw the fund in less time. Secondly, low-risk investment If you have invested in high-risk investment options for higher returns, it may cost you in emergency situations as you will have to sell the assets even with the loss.
Use emergency funds with caution
Do not use emergency funds for anything that can be avoided. Avoid purchasing any costly items with no value added to your personal or financial growth, planning expensive travel, etc. when it is really not necessary. Remember,
“It is never too early to encourage long-term savings.”Ron Lewis
Tips to save emergency funds
Here are some tips to help you save money and use your emergency fund more effectively
- Make a budget and stick to it. Creating a budget will help you track your spending and see where you can cut back.
- Automate your savings. If you can set up an automatic savings plan, it will help you save more money without thinking about or missing it.
- Save money on groceries. Grocery shopping can be expensive, so try to make substitutions or use coupons.
- Cut back on unnecessary spending. Try to curb your spending on things that you don’t need.
- Consider refinancing your debt. Refinancing your debt can help you save money on interest payments and could potentially result in a lower interest rate.
Few recommendations for savings ways
Here are a few ways of planning your emergency funds. However please do your own research as per your risk profile to choose the correct investment option.
- High-yield savings account
- RD or FD with premature withdrawal option
- Digital Gold
The emergency fund is nothing but savings that are set aside for future urgent financial needs.
A few of the emergency fund examples can be a car repair, home repair, hospital bills, loss of job, loss of business, etc.