Why do you need an emergency fund?
Preplanning is a crucial factor in successfully weathering storms like finance-related issues. An emergency fund can be your rescue if you are struggling with unexpected financial expenses. Haven’t we learned from the Covid-19 pandemic that an emergency can happen anytime, at any point in life? While the COVID is one such instance, many other unpredictable events can occur in our lives. Unforeseen incidents can lead to unwanted expenses, and you may drive short of money at the time. So, securing a portion of your income for such times to avoid the financial mess is a smart investor move. Typically, emergency funds have three to six months’ worth of expenses. But the 2020 economic crisis has led some experts to suggest it’s worth up to one year.
What is an Emergency Fund?
Essentially, an emergency fund is money that’s been set aside to cover life’s unpredictable circumstances. These funds make a financial buffer that can keep you afloat in a time of need without having to depend on credit cards or loans. You can use your emergency fund to handle stressful events and make it easier to stay focused on getting out of debt. Some common instances include car repairs, home repairs, medical bills, or a loss of income.
Emergency savings can be utilized for large or small, unanticipated bills or payments that are not part of your regular monthly expenses and spending.
How to Build an Emergency Fund?
There are simple ways to begin your savings to create emergency funds.
- Start with your budget and decide how much you can reasonably spare
- Choose the right investment option
- Begin with a small, regular contribution
- Make it an every-month habit
- Ensure to automate your investments
- Make sure you don’t increase your monthly spending or open new credit cards
- Do not over-save
Reasons to Have Emergency Funds
- You’re trying to pay off debt
With an emergency fund, you can stop adding debt with every financial bump in the road. It can help cover the things you don’t budget for, such as car repairs or medical costs. It becomes easier to pay extra expenses right away with the help of such funds.
- Single income
It is important to have a significant emergency fund if you only have one source of income. This can help you get through an unexpected event that can keep the primary earner from working. Also, if you are just starting a family, you may require to increase your emergency fund.
- You are self-employed
It is essential to have a good emergency fund in place if you are self-employed. Also, if you know that your agreement may end soon, you should start working on building up more money in your emergency fund.
- You live away from family
Having a good emergency fund saved up to cover the cost of last-minute tickets can help you to go home or visit family members in the event of a medical emergency or any circumstances.
- Medical emergencies
Medical issues can be costly, and insurance companies may not pay everything that you hope them to pay. Additionally, you may have routine tests or need to use all of your sick leave, which can lead to bigger issues. So, your emergency fund can help you offset this.
- Saving for a goal
An emergency fund can help you achieve your long-term financial goals. If you are working on your goal to own a home or start a business, your emergency fund can stop you from sinking into those savings when unexpected expenses crop up.
Today, most people aim for financial independence at a younger age. An emergency fund is just like a parachute that saves you from a financial crisis. Comprehending that you have adequate money to cover yourself in a situation can help you feel more at ease. While you can't anticipate when an unforeseen expense or challenge will bring a swing to your budget, you can be ready to recover from these blows by setting aside funds.
Mutual fund investments are subject to market risks, read all scheme related documents carefully.
