What is Emergency Fund: In case of sudden job loss, medical emergency or any big expense, Emergency Fund can become your biggest financial security. Know what is an emergency fund, how much money should be there in it, how to prepare it and for which expenses it should not be used at all.
Emergency Money Guide: Everything in life is not decided in advance. Sometimes you suddenly lose your job, sometimes there is a medical emergency at home, sometimes the car suddenly breaks down or some big expense arises, then at such times, if you do not have money saved separately, then it becomes a big problem. That’s why there is an emergency fund. This can make the difficulty much easier. Emergency fund is the money which is kept aside only for sudden urgent situations. It is not for everyday expenses or shopping.
What is Emergency Fund?
Emergency Fund is a fund which you save for any emergency situation. It is used only when you do not have any other option for income or suddenly a big expense arises. For example: Suppose you suddenly lose your job. If you have an emergency fund equal to 6 months’ expenses, you will not need to take a loan until you get a new job.
Why is Emergency Fund important?
1. Protects from sudden expenses
Expenses like illness, accident, home repair or any important travel can arise at any time. In such times, emergency fund comes first.
2. There is less need to take loan
If you do not have savings, you may have to take a credit card or personal loan, which charges higher interest.
3. Provides support when you lose your job
In today’s time, job is not guaranteed. Emergency Fund helps in meeting your essential expenses for a few months.
4. Reduces mental stress
When there is confidence that some money is saved when needed, financial stress also reduces significantly.
5. Prevents investment from breaking midway
If you have invested money in mutual funds, PPF or FD, then there is no need to break them prematurely in times of emergency.
Also read- Why does excess oil cause harm? Know how this habit can increase the risk of heart attack
How much money should I have?
According to financial experts, you should have an emergency fund equal to at least 3 to 6 months of essential expenses. If your job is not stable or you are a freelancer, it is even better to have a fund equal to 6 to 12 months of expenses.
How to create an emergency fund?
1. Save a little every month
If your income is ₹40,000, start setting aside ₹2,000–₹5,000 every month.
2. Keep in a separate bank account
Keep the emergency fund separate from the everyday expense account, so that it is not spent unnecessarily.
3. Keep it at a place where you can get money immediately when needed, like –
- savings account
- Fixed Deposit (FD)
- Liquid mutual funds (which can be withdrawn quickly)
Also read- Why does Wi-Fi disconnect again and again? Know its 8 big reasons and easy tips to fix it in minutes
For what things should the emergency fund not be used?
- to buy mobile
- to celebrate holidays
- shopping online
- to buy expensive gadgets
- For non-essential expenses of the party or wedding
Example: Suppose Ram’s monthly essential expenses are ₹30,000. He has saved 6 months’ emergency fund i.e. ₹ 1.8 lakh. Suddenly he loses his job. Now he can manage his household expenses for the next few months without any worry and can comfortably search for a new job. On the other hand, if he had no savings, he might have to take a loan immediately.