How to build an emergency fund
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Have you ever thought what if you lose your job tomorrow unexpectedly? And you have no job offers at hand? Well, there is always a way out if you plan things beforehand. The answer for your sudden employment or any crisis is having an emergency fund. Typically, you need to save three to six months of expenses in your emergency fund. Here are some ways to build your emergency fund:
The first step to build your emergency fund is to track your regular expense. You should track your EMIs, your daily expenses like travel, bills like mobile bill and other payments so you exactly know how much money you have to save in your emergency fund.
Your expenses decide how much you should have in your emergency fund. There are different types of emergency funds. Bare bones emergency fund will consist of the expenses that are absolutely necessary expenses. On the other hand, a relaxed emergency fund may include non-essential expenses such as dining out, going to movies, vacations etc. The type of emergency fund that you want to make depends on you.
You should always include your loans and EMI while building your emergency fund as loans and EMIs are part of your monthly expense.
Many people have fix income every month but many do not have fix income sometimes they earn Rs.20,000 or Rs.50,000 a month. These are those people who have small business and those whose earnings are completely dependent on customers purchase.
It is not necessary that you have to build the entire emergency fund at one go. To begin with, you can allocate a certain proportion of your income towards building an emergency fund. You can start by allocating 5% of your income towards building the emergency fund.
You cannot keep your emergency money in cash. You need to park your emergency money in a financial instrument that is highly liquid such as a liquid fund or a savings account. Two-thirds of the emergency corpus can be parked in a liquid fund while the rest can be saved in a savings account.
Read: Savings vs Liquid Fund: Which one is the best for you?
You can always buy insurance like health insurance, car insurance or insurance for your valued items. A hospital bill can wipe off your decade savings. Insurance will ensure that the money allocated to your financial goals is not broken to fund the emergencies. Having insurance will also make sure that your emergency fund is not dipped for expenses that can be easily covered by insurance.
To summarise, it won’t be wrong to say that emergency fund should be the first step while planning for your finances. It needs to be taken of before you start investing or take insurance. Have at least three months of expenses in your emergency fund. With an emergency fund, you can be prepared to face any emergency that comes on your way.
Tags: investments, emergency funds