We are halfway down this dreadful year 2020. The year starts with a pandemic COVID-19 & get drenched everybody in it. Due to this pandemic, countries get lockdown to save people a month or two. But now, the lockdown has been lifted & people are back to their work. The side effects of this lockdown are now, facing by everybody. The inflation has risen; GDP contracts & people are jobless. In India, during lockdown when there was no money was flowing, people were withdrawing PPF amount for their living. People did not expect this situation in their life. Nobody expected even. Nobody prepared for this emergency. And very few people have an emergency fund in their bank account. The other was living on their savings only. This situation is quite enough to make you understand how important an emergency fund was. How important is financial education? (Also read – Are you financially educated?)
An emergency fund is a kind of amount that keep aside to deal with unforeseen, unavoidable situations. Just like COVID-19 situation
Other situations are:
- Medical Emergencies
- Job Loss
- Salary pay cuts
- Home Repair
- Sudden car expenses
In India, most of the people are living on a hand to mouth salary. That means the amount you received from salary gets drained during expenses. In that situation, if any emergency arises in front of you that makes financial trouble in your life.
To conquered these situations, an emergency fund is required.
“It may take you months or even a few years to build up an adequate savings fund. That’s okay.” – Suze Orman
HOW BIG IT SHOULD BE?
How big it should be depends upon you only. Nobody knows how big the emergency arises. But you know your day to day expenses and your savings.
It always finds its place in the short-term, vision. You never know when you need this fund.
But according to me, you must keep aside an emergency fund in small targets or milestones like below:
1st Milestone: you must save money equal to your three-month salary
2nd Milestone: In your 2nd milestone you must save money equals to your six-month salary
3rd Milestone: In the 3rd milestone, you must save money equals to your one year salary.
These milestones depend upon you if you reached the 3rd milestone, don’t stop there keep setting your milestones to make a big corpus of your fund.
The bigger will be the emergency fund, the bigger will be the relaxation & you will always keep yourself away from financial troubles. (Also Read – 50 30 20 Budgeting rule – Problem and its solution)
HOW TO START BUILDING AN EMERGENCY FUND?
As I already explained; the situations where this fund is majorly required. The major portion of the emergency fund is required to cover medical expenses or job loss. Sometimes, in-car expenses or home repair as well.
Now, the question arises on how to build an emergency fund?
It can build by putting aside a small portion of your income. The portion is then divided into major life covers like:
- A portion put to buy life insurance,
- A portion put to buy medical insurance,
- Another portion to buy vehicle insurance,
- Another portion for your property insurance
- Last, high liquid cash balance where you can liquid your money whenever required.
Every other bank is giving an option for recurring deposits that can be liquid at any moment. To keep your cash into a bank account will give you nothing but recurring deposits can give some interest over your emergency fund.
You must keep in mind the inflation that is eroding your money regularly.
I have read somewhere over the internet about the 15:15:70 method for managing the emergency fund. In this method, 15% & 15% amount is required to keep your cash in hand and bank accounts. This cumulative 30% of emergency fund provides quick access for immediate use.
The balance 70% amount you must keep in short term deposits or liquid mutual funds.
Always remember, it is required in a short term period. So, choose wisely where you keep building an emergency fund.
If you still do not start creating an emergency fund, then this is the right time to start. Before you entered the world of investing you must have an emergency fund. The emergency fund must not keep into the highly volatile investing instrument. Like you should not invest your fund into the stock market with thinking I can double the money thru this instrument. We all know when pandemic strikes suddenly, the market was touching the lower circuit every day. The stock market is a very good instrument for long-term investments only.
“Your emergency fund is not an investment, it’s insurance with one purpose – to protect you and your family.” – DAVE RAMSEY