In life there are always hard and easy times , an individual has to embrace the hard times as well as embrace good times. Saving for the financial security is always a wise thing to do and assists in handling various mis happenings, including the importance of building an emergency fund for added security during tough times.
Savings for emergencies turn out to be beneficial in protecting the financial situation and helping in properly managing an emergency. An emergency fund also can assist with health crises, job loss, automotive breakdowns, etc.
In this article, learn about the emergency fund, how to build it, and why it is so important. Continue reading.
What is an Emergency Fund?
It is the saved money or financial safety net that is put and kept aside for the purpose of addressing any emergent or unusual occurrences. It often includes money saved for such incidents as the loss of a job, medical-related issues, travel , house , and/or car repairs.
The emergency fund is designed to establish a reserve of funds to reduce the extent of reliance on borrowings and credit facilities.
An emergency fund is designed to prevent you from going into debt and to keep your financial cushion safe in case of such occurrences. Although the practice of putting aside three to six months of living expenses is recommended, the sum varies depending on circumstances.
Discover the Importance of an Emergency Fund
It is, therefore, important first to understand the importance of an emergency fund before grasping the way how it is built. The ultimate goals of creating an emergency fund, therefore, are to have some money saved and to have financial security.
Now it is high time to focus on the most significant factors that contribute to the necessity to have an emergency fund.
Financial Security:
An emergency fund is a good method used in creating reserves and simultaneously opens an account that can be used in addressing emergent liabilities. It reduces the need to opt for high-interest debits and loans.
Reduces Stress:
Facing an unexpected situation can lead to stress and frustration. But, knowing that you have a saving to handle the situation effectively offers relaxation and relief. It reduces anxiety or stress and allows you to focus on resolving the emergency.
Avoid Taking on Debt:
Emergency funds assist you in avoiding walking through the pitfalls of debt and coming out stronger in difficult circumstances. Emergencies are likely to make you take loans and thus create a cycle of indebtedness, and paying back the loan can strain your finances.
Safeguard Your Long-term Financial Goals:
Saving for emergencies is the most important technique in avoiding the distortion, disruption, or total destruction of one’s long-term financial planning goals. After you have the funds to handle emergencies, you are well-placed to protect your long-term savings or even other forms of investment.
Enhances Decision-Making:
In case of an emergency, people are likely to react emotionally and make unwise financial decisions regarding the situation, for instance, medical issues, loss of job, accidents, etc. An emergency fund enables you to avoid those feelings and urges and make rational decisions as to how to overcome the situation.
Boosts Confidence and Peace of Mind:
Financial security enhances confidence building and this in a way achieves a kind of calm. Having the information that you can be prepared for demanding conditions financially frees you up to achieve any personal and professional goals.
Promotes Financial Discipline:
Budgeting money and saving up to cater for disaster in issues play a big role in enhancing financial discipline. Appreciating the importance of saving as well as budgeting advances your quality of financial development. Therefore, the emergency funds assist in the reduction of cases of accruing unnecessary debt.
Essential Tips on How to Build an Emergency Fund
As we have established the need to create an emergency fund it is now high time we answered the basic question, how to build an emergency fund? Concentrate on the step-by-step guidelines on how to build an emergency fund:
1. Setting a Goal
The first step in creating and managing savings for emergencies is setting a clear goal. Your goal for building an emergency fund should be focused on two things:
Determining the Amount:
Defining an amount involves having an idea of the amount of money that one aims to save in the emergency funds. An ideal emergency fund should in any case be equivalent to 3 to 6 months of living costs in a complete sense that includes utility bills, food, insurance, vehicles, etc.
Always Start Small:
Perhaps saving a large sum for the creation of an emergency fund tends to be a problem. You can start by saving rupees ₹1000 to 1500 per month to build a saving to deal with emergencies.
2. Assess Your Current Finances
When deciding to initiate the process of creating an emergency fund, evaluating one’s current financial situation is pivotal to realistic budget planning . When determining how much amount to save in a year to start the emergency fund, one should analyze his/her income and expenditure.
Perform a budget analysis to try to identify how much of your income can be put aside in an emergency fund. There is also the option of automated saving , which entails the transfer of the amount from a checking account to a savings account.
3. Select the Appropriate Savings Account
The next step in building an emergency fund is choosing an appropriate savings account. Picking a high-yield savings account is a better option than going for a conventional savings account.
High-yield savings accounts offer high interest rates and support faster capital growth. You must also ensure that the account is easily accessible and there are no hidden charges on withdrawals in case of emergency.
4. Make Savings Your Top Priority
You must make regular contributions to the emergency fund your top priority and give it equal importance as paying a utility bill or rent.
Make emergency fund savings a part of your monthly budget. You can also save your bonuses in the emergency savings account .
5. Try to Increase Your Monthly Income
Try to start a side hustle to earn an extra income and save the same into your emergency fund. You can also consider selling your used clothes, electronics , or furniture and save the amount in your emergency fund.
6. Maintain Consistency
Consistency is the key to building an emergency fund as you need regular contributions to build a decent amount of money to face an emergency. You must contribute regularly even if it is a small amount.
Furthermore, monitor your progress by tracking the savings as it will give you the motivation to continue with building funds .
How to Keep an Emergency Fund Safe?
It is essential to keep your emergency fund safe and secure, ensuring it’s available when you need it. Explore some pro tips to safeguard your emergency fund.
1. Use a Separate Account:
Your emergency fund should not be in your normal savings account; it is advisable that it is kept in a separate emergency fund account. It is advisable to open a high-yield savings account and make regular deposits towards the accumulation of emergency funds.
2. Avoid Risky Investments:
Do not invest your money which is reserved for emergencies in high-risk assets such as stocks, bonds, crypto, etc. You set aside cash for emergencies, not to make cash.
3. Don’t Link Cards to Emergency Fund:
Do not associate any credit or debit card with the account that has been created for the purpose of its use in building an emergency fund.
4. Use Only for Emergencies:
Do not withdraw from the funds and also make sure you use the money for only emergencies. In other words, one should try and resist the temptation of using money from the emergency fund on frivolous things .
5. Monitor Account Regularly:
Another is that you should scrutinize your account statements for any charges or unlawful transactions.
Conclusion
To sum up, the emergency fund is crucial in the process of financial management and needs to be created to be prepared for any unexpected event . The provision of funds that can be used for urgent needs is one of the essential parts of the financial plan and contributes to confidence.
Thus, be it a medical emergency, an unplanned trip, a home repair, or any other such situation, an emergency fund is a safety net. It also promotes financial discipline and enhances overall financial growth .
