The Ultimate Guide to Building Your Emergency Fund: Be Prepared for Life's Unexpected Twists

Life can be unpredictable, especially when it comes to finances. Whether it's a surprise medical bill, a coffee spill on your laptop, or a dreaded job layoff, we've all experienced those "Oh no, not now!" moments. But fear not! Building an emergency fund is your superhero cape, ready to swoop in and save the day. In this blog, we'll show you how to create an emergency fund, determine the right corpus, where to park your funds, and strategies to build your very own safety cushion.

What is an Emergency Fund and Why Do You Need One?

An emergency fund is a pool of money specifically set aside to tackle unexpected financial hiccups that life throws our way. Think of it as your personal stash of "just-in-case" funds. It saves you from resorting to credit cards or loans during tough times and helps you maintain your financial well-being.

How Much Corpus Should You Set Aside for an Emergency Fund?

Determining the right corpus for your emergency fund is crucial. While the ideal amount varies for each person, a general rule of thumb is to save at least three to six months' worth of essential expenses. Calculate your monthly expenses, including rent, loan installments, utility bills, Spotify premium (we all need some music in the trying times, don’t we), but exclude non-essential items like dining out or online shopping. Multiply this amount by the number of months (usually 6 to 12) you want to be covered, and you have your target corpus.

Factors like seasonal or commission-based jobs or both partners working for the same company may influence the duration you should aim for. Consider saving for a longer time frame, such as nine months. Alternatively, create multiple emergency funds with varying time frames and purposes, such as a short-term fund for immediate necessary purchases and a long-term fund for job loss. Remember, even saving a smaller amount is better than nothing at all.

How to Build Your Emergency Fund?

Regularly setting aside a portion of your earnings is the most reliable way to build your emergency fund. Determine how much you can comfortably save after covering your essential expenses and other savings goals. By automating the process, you'll develop a habit of saving consistently. Additionally, consider depositing any annual bonus or part of a salary increase into your emergency fund to expedite its growth.

Where Should You Park Your Emergency Fund?

The main goal of an emergency cushion isn't to earn big returns but to have a reserve to cover necessary costs until things turn around. It is also important to keep your money out of sight and out of mind, so you're not tempted to spend it on impulse purchases. Look for options that offer high liquidity and safety.  That's where options like liquid mutual funds or fixed deposits come into play, offering a smart alternative to a regular savings account.

LIQUID MUTUAL funds allow you to invest your emergency funds in a hassle-free manner while ensuring quick access to your money when needed. They provide better potential returns compared to a savings account, and since the money is not within immediate reach, it's less likely to be spent on unnecessary expenses. It's like putting your money into a little adventure while keeping it safe and growing.

FIXED DEPOSITS, on the other hand, offer a more structured approach to saving. By locking in your funds for a specific period, you can enjoy higher interest rates and the peace of mind that your money is working for you. Since the funds are not readily available in your everyday savings account, you're less likely to dip into them for non-emergency expenses. However, it's important to note that if you need to access your funds before the maturity date of the fixed deposit, you may be subject to a penalty or fee.

Alternatively, you can also consider a savings account with an auto-sweep feature. This feature automatically transfers any excess funds in your savings account to a fixed deposit, which earns a higher rate of interest. This way, your idle money can still work for you and earn better returns than a regular savings account, while still providing the convenience of easy access when needed. It's a win-win situation!

Do's and Don'ts for Managing Your Emergency Fund

Do's:

• Prioritize building your emergency fund over non-essential expenses.
• Review and update your emergency fund periodically to ensure it remains adequate.

Don'ts:

• Feel bad about using the money from your emergency fund if you need it; that's what it's for.
• Dip into your emergency fund for non-emergency purposes.

Conclusion:

In today's fast-paced world, many people have their sights set on achieving financial independence at a younger age. They want to retire comfortably and have their financial bases covered sooner rather than later.

One key step in this journey is building an Emergency Fund that can handle unexpected expenses that might come their way. While it may sound like a luxury during normal times, having an Emergency Fund can truly be a lifesaver during unexpected situations, like the lockdown we all had experienced during COVID-19.

If you haven't started building your Emergency Fund yet, why not make 2023 the year you take that first step? It's a smart move that can provide you with peace of mind and financial security.

So, here's to a prosperous future and a successful journey towards financial independence.

Happy investing!