Are you prepared for all emergencies Are you prepared for all emergencies
Home Credit - Consumer Durable Loans

Why is it important to have an emergency fund, How can you build one! 

Why is it important to have an emergency fund? How can you build one? 

A financial plan is successful when you are able to deal with both planned and emergency expenditures. While you might have a saving plan for financial goals such as saving up for the down-payment of a house or a car, it’s equally important to have an emergency fund so that you can manage during an emergency without dipping into your savings. 

Why should you create an emergency fund?

  • Protects you against unforeseen circumstances and expenses– It’s difficult to predict sudden expenses- whether it’s due to repairs for your car after an accident or unexpected job loss or unplanned hospitalisation. In such an event, the sudden costs can be an added stress to you. In such a case, having an emergency fund means that you can tackle them without having to worry about money as you have your emergency fund to take care of such unexpected expenses.
  • Prevent your goals from getting side-tracked– When you face a sudden expense without an emergency fund, you might have to take money you had actually saved up for other goals, which means that it could take longer to achieve them. Having an emergency fund means that you don’t have to compromise on your long-term goals in case of an unexpected expense. 
  • Avoid interest costs from having to borrow during emergencies– In case you end up borrowing or taking a loan to meet your emergency expenses, you will also have to pay interest- apart from the stress of actually paying the amount back. Instead, an emergency fund is something you can control and access whenever you need to. 

 

Why is it important to have an emergency fund? How can you build one? 

How should you build an emergency fund?  

The thumb rule when saving for an emergency fund is to have at least three to six months' worth of expenses put aside. When deciding how often you want to contribute and how much, it’s important to consider your monthly expenses and lifestyle. Here are some ways you can start to save for an emergency fund:  

  •    The Aggressive Way

This method is best if you are in your 40s or 50s and don’t have an emergency fund. Start by calculating the minimum amount you need to save for an emergency fund and set a time by which you want to achieve this.  Now, reduce all your expenses to the bare minimum and put away every extra rupee you have towards building this emergency fund.

For instance, if you are in your 40s, try to put aside a minimum of 20-30% of your salary towards your emergency fund. 50% of your monthly income, after-tax deductions, can meet essential living expenses like rent, utilities, and food. EMIs, debt repayments and investments can take up the remaining 20%.

Read How to figure out how much to save in an emergency fund to know more.

  •    The Gradual Way 

This is a more systematic approach to building an emergency fund and is advisable if you start saving up as soon as you start earning. You can put aside a small percentage of your income each month till you reach about 3-6 months’ worth of expenses.  

Since you’re building this fund early, it’s best to not let your funds lie idle in the bank. The best thing you could do is spread the money over your savings account, short term FDs and other short-term savings instruments such as liquid mutual funds. This way, you will have quick access to your cash and earn interest on it.  

Read Whose saving method is the best? to learn about the pros and cons of some saving methods in a fun way.

  •    The Occasional Way 

If you are unable to save monthly due to an irregular income or other financial obligations, you can give yourself a slower start - instead of setting a monthly goal, you can get a bi-annual or annual goal to save up instead. While you will still have to monitor yourself frequently to ensure you reach your goal, this means that you can contribute to your emergency fund when you can.

If you receive a large amount of money (due to a bonus or income tax refund), you should put that towards your emergency fund.  You can also put away any unexpected interest income you receive towards building this fund.

No matter which saving method you choose, remember to keep checking in your emergency fund from time to and restore it to the original amount in case you have taken away from it. This will ensure that you are financially prepared for any emergency.

Did you find this article helpful?
Send us your suggestions

Related Topics

  • |
Where can you find extra funds to save!
  • Managing Money

Where can you find extra funds to save!

Every small drop makes an ocean. Similarly, every rupee you save could come to use in the future. In this article, we offer you ways to save money in the most unlikely of ways.

Teach your kids the whys and hows of money management
  • Managing Money

Teach your kids the whys and hows of money management

Responsible children grow up to be wise adults. Give your children the tools to become financially successful in the future with these tips.

Questions you didn't know whom to ask about budgeting
  • Managing Money

Questions you didn't know whom to ask about budgeting

Do you want to start budgeting but don’t understand how? We’ve answered budgeting FAQs that can help you kickstart your journey.

How can insurance help you deal with emergencies!
  • Managing Money

How can insurance help you deal with emergencies!

Having an insurance plan is like having a life jacket – you won’t know how useful it is unless you really need it. Read on to understand how the most common types of insurance plans can help you.

8 budgeting apps that can make money management easier
  • Managing Money

8 budgeting apps that can make money management easier

GET SMART WITH YOUR MONEY MVELOPES. It divides your expenses into separate categories or 'envelopes' and allows you to set spending limits.

9 modern ways to save money
  • Managing Money

9 modern ways to save money

ONLY KEEP AS MUCH CASH AS YOU NEED This will help you reduce impulsive spending and stay aware of every rupee you spend

How can you protect your family with life insurance!
  • Managing Money

How can you protect your family with life insurance!

Sahu ji is worried about his family’s wellbeing but doesn’t have a life insurance plan yet. Arvind helps him understand why it is important to get one.

10 steps that can make a big difference in your budget
  • Managing Money

10 steps that can make a big difference in your budget

Having a fool-proof budget can get you on the right financial track. Use these 10 tips to keep your finances on track.

Why should I save money when getting loans is so easy!
  • Managing Money

Why should I save money when getting loans is so easy!

While taking a loan might be an easy option, it’s not advisable to borrow unnecessarily. Learn more about benefits of saving regularly and consistently.

Know where all your money is going before you start budgeting
  • Managing Money

Know where all your money is going before you start budgeting

Vidhi complains to Arvind that despite budgeting as he had suggested, she still isn’t saving enough. Read this comic strip to know why and how Arvind helped her find a way to save thousands of rupees!

How to keep your money safe from yourself!
  • Managing Money

How to keep your money safe from yourself!

Make your budget water-tight by using these tips to keep yourself from misspending your money.

7 Budgeting pitfalls that can push your finances off track
  • Managing Money

7 Budgeting pitfalls that can push your finances off track

Feel like your budget isn’t quite working? You could be making any of the budgeting mistakes listed here. Read on to know how Seema and Uday fixed their budgets successfully.

Right time to start saving: In your 20s or 30s!
  • Managing Money

Right time to start saving: In your 20s or 30s!

This infographic shows when you should start saving and why through Aisha and Riya’s stories.

Where to park your emergency savings!
  • Managing Money

Where to park your emergency savings!

While emergency funds are meant to be easily accessible, that doesn’t mean you should store it all in cash. Instead, follow these tips to keep them secure yet accessible.

How to start saving money
  • Managing Money

How to start saving money

This article talks about old and new ways of saving money. It also mentions quick tricks to save more from everyday expenses.

How to figure out how much to save in an emergency fund!
  • Managing Money

How to figure out how much to save in an emergency fund!

If you want to save but don’t know how much to, read this infographic to choose a method that suits you best from three easy options.

Are you overestimating your income when budgeting!
  • Managing Money

Are you overestimating your income when budgeting!

Overestimating income is a more common mistake that you would think. In this article, we give you step-by-step guides to avoid spending with the assumption of having more money.

How important is it to have medical insurance!
  • Managing Money

How important is it to have medical insurance!

Sameer understood the importance of having medical insurance only after getting into an accident. Here’s what you can learn from his experience.

Setting smart financial goals
  • Managing Money

Setting smart financial goals

It’s not just about how much you save. It’s also about how S.M.A.R.T you save. Find out what they are for you and how you can save for them.

easy loans home credit