An emergency fund has become a basic need for every working professional, as it builds a backup in any emergency. There are numerous situations when your emergency fund works as a wonder. There comes a case when you want urgent cash to combat the crisis. Personal loans by banks or NBFCs can help you get the money you need.
What is an Emergency Fund
As the name suggests, an emergency fund is a fund that can be used when you have no income source but have needs to fulfill. You save the immediate cash for the future instead of opting for an overdraft facility, personal loan, credit card cash, etc. It is also a practical solution to handle your emergency expenses.
The big question is how you can create an emergency fund. Below are the points that will help you create enough funds for your future.
Add Emergency Saving in Budget: It is assumed that you are already following a monthly budget plan and are saving accordingly. If not, you must start by preparing the budget to help you manage your income and settle a specific portion for monthly needs, wants, and savings.
Make a Monthly Commitment: Many people focus on investing their money in stocks, mutual funds, and other ROI assets but forget to prepare an emergency fund. Hence, you should give emergency fund priority and collect enough funds before starting your investment journey.
Experts always recommend preparing your emergency fund to stay stress-free from any mishap and then focusing entirely on the investment strategy you prepare.
Diversity Your Fund: Preparing an emergency fund doesn’t mean keeping the entire amount in your bank account. Instead, you must follow a 30:70 ratio method to prepare your emergency funds. It means 30% of your emergency fund must be kept handy, i.e., in your bank account. This amount remains secured and is readily available within minutes. The rest 70% of the fund must be prepared in the form of Debt Funds (under Mutual Funds). It will give you better results compared to a saving account. Moreover, it will be easily available within 1-2 days.
Maintain Dedicated Bank Account for Saving: Never save money for the emergency fund in an account you use regularly. Instead, start a new bank account and save money. It’s important to keep the emergency funds untouched; that is only possible if you don’t use the emergency fund account.
How to Calculate Your Emergency Fund?
The simple emergency fund rule is calculating the money required to manage your needs in a month. Your needs might include the following:
- Grocery items
- Mobile recharge bills
- Internet bills
- Petrol for your vehicle
- Other Utility Bills ( Electricity Bills, Water Bills, etc.)
Once your expenses are calculated, multiply them by six. It means you must prepare an emergency fund for at least six months. E.g., if your monthly expenses are INR 50,000, you must maintain an emergency fund of INR 3,00,000.
That said, you can start preparing your emergency fund and secure yourself from any unexpected job loss, medical emergency, or sudden fund requirements.