Steps to Building an Emergency Fund

It doesn’t matter how well you earn or how wisely you’ve invested if you find yourself on the back foot in the face of emergencies. Yes, life throws you a curveball every once in a while. And you need to have a rainy fund ready to play it well.

But that’s easier said than done. Many Indians find it difficult to build and maintain an emergency fund. In fact, only 27% of Indians have an emergency corpus at hand, as per a MoneyControl survey.

If you, too, are struggling to build a financial safety net or constantly find yourself dipping into your savings, here’s a quick guide to emergency fund planning to help you out.

What is an Emergency Fund?

Simply put, an emergency fund is a sum of money set aside to handle unforeseen expenses like medical emergencies, job loss, or urgent repairs. It acts as a financial buffer, helping you manage unplanned costs without relying on loans or credit cards. The goal is to provide stability during tough times.

Why Do I Need an Emergency Fund?

An emergency fund helps you stay financially secure during uncertain times. Whether it’s a sudden job loss, medical expense, or urgent repair, it allows you to handle the situation without disrupting your financial plans. It reduces the need for high-interest loans and ensures peace of mind. This financial cushion protects your savings and helps you focus on long-term goals even during emergencies.

How Much Do I Need in It?

The amount you need in an emergency fund depends on your monthly expenses and age. Financial experts recommend saving enough to cover six to nine months of living costs. For example, if your monthly expenses are INR 30,000, your emergency fund should be between INR 1,80,000 (INR 30,000 x 6) and INR 2,70,000 (INR 30,000 x 9).

You can use this formula to calculate your emergency fund-

Emergency fund = Monthly expenses (rent + food + transport + utilities + school fees + EMIs + miscellaneous) x 6 to 9 months.

An emergency fund ensures you have sufficient savings to handle unexpected events such as medical emergencies or job loss without financial strain.

How to Build an Emergency Fund Fast

You cannot build an emergency corpus overnight. You must diligently set aside a portion of your monthly income to build a sufficient reserve. 

In that regard, here are some tried-and-tested tips to help you out.

1. Open a separate bank account

You’ll want your emergency money to be safe and liquid. A savings account checks both boxes and, therefore, is the best option to house your emergency funds.

Fixed deposits are also a good idea as they allow you to accrue interest on your funds over time. However, they may not be as liquid as a savings account.

Besides, many savings vehicles today provide quarterly yields on your funds. So, your money not only stays safe and liquid but grows as well.

2. Start with small but regular deposits

The key is to make emergency savings a habit and not a monthly struggle. So, it’s best to make small deposits initially. If you start big, it will strain your cash flow too much, and you’ll abandon the routine altogether.

If you can’t find any financial headroom in your expenses, find something you can live without. You can cut back on ordering out or postpone your shopping.

3. Set an achievable target

Knowing what you’re saving will give you that extra incentive to keep at it.

But how do we set this target? Well, it will depend upon the number of dependents that you have. If you’re the only earning person in the household, you’ll need to save enough to cover six months of your expenses.

If you have a spouse who also works, you can build an emergency fund that covers three months of your expenses. These expenses include food, utilities, bills, and insurance.

4. Tap into the fund only during emergencies

Most importantly, use the emergency fund only if you’re out of your job, need to service a long medical bill, or have home repairs to make.

Lastly, make sure you start saving again. Emergencies don’t have a cooldown period.

Over to you

Using your current bank balance or taking out a loan to cover emergencies is a bad idea. At the outset, you won’t have a clear way to differentiate between your daily cash and cash reserved for emergencies. Moreover, going down the debt route to cover financial emergencies can quickly spiral out of control.

That’s why building a separate crisis fund is essential to tackle emergencies.

You can also build your emergency corpus with smart investments. Start today with Tata Moneyfy's investment app and save like never before. Visit our website to know more.

FAQs

Where can I build an emergency fund?

You can build an emergency fund in a savings account, liquid mutual fund, or fixed deposit. These options provide easy access and minimal risks. Avoid using high-risk investments like stocks to safeguard your fund during emergencies.

What is the first step to building an emergency fund?

Assess your monthly expenses, including rent, utilities, and EMIs. Set a target to save three to six months’ worth of expenses. Start small by saving regularly and reducing non-essential spending. Use a separate savings account or a liquid mutual fund for effective fund management.

What is the best emergency fund?

An ideal emergency fund is easily accessible, safe, and offers moderate returns. Savings accounts and liquid mutual funds are reliable options. Fixed deposits are also suitable if they allow quick withdrawal. Avoid investments with high risks or those that lock in funds for the long term.

How much emergency fund is sufficient?

Experts suggest saving three to six months of living expenses. For example, if your monthly expenses are Rs. 30,000, save between Rs. 90,000 and Rs. 1.8 lakh. Adjust this amount based on your income stability, lifestyle, and family needs to ensure adequate financial security.