Why You Need an Emergency Fund
Having extra cash is helpful when the world falls apart. But emergency funds, while great in theory, are very difficult to put into practice. Only a few people get around to saving as they have more urgent financial demands. Part of the problem, of course, is on the income side: Too many people cannot make enough money to live on, let alone accumulate funds for a rainy day. On top of that not knowing how to save adds to the problem. They want to put aside money, but it just seems intimidating. They do not even know where to start. However, one should learn to manage money moving between short, medium and long-term priorities.
So, what is an emergency fund?
An emergency fund serves as a financial safety net for future unexpected expenses. Consider it to be an insurance plan, against tough times, one that will not fail. By paying yourself money that you can use at a later time, the cash can be accessed quickly and easily should an unfortunate event occur.
Why an emergency fund?
Your emergency fund covers you in the event of unexpected financial blows, such as:
• Unforeseen medical expenses
• Home-appliance repair or replacement
• Major car fixes
• Unemployment
•Unforeseen events (future pandemics)
How to start an emergency fund?
The simple rule of 3 or 6
Calculate the minimum amount you could survive on should things get tight, then multiply that figure by 3. This may serve as your starting goal for your emergency fund. Eventually, you will want to save enough to live on for three to six months if you had to.
Experts suggest Emergency funds should typically have three to six months’ worth of expenses, although the personal experience of the 2020 economic crisis and lockdown has led me to believe up to one year's worth- better safe than sorry.
The Change Adds Up
Saving small goes a long way. Consider a study recently (From a financial service provider namely, Acorns) found that people who chose to save a small amount every day saved more overall than people who saved a certain amount each month. For instance saving 200 rupees for 30 days can be a better plan rather than saving a solid 5000 rupees.
Plastic Points & discounts
Plastic money while being incentivizing to use in terms of convenience may have more to offer. Here's how: Incentives such as ‘x%’ discounts on certain products by using specific debit or credit cards may help. Some cards will enable you to earn points against every transaction made which in turn could be used to buy other products or be redeemable for further discounts. The amount saved could then be diverted towards beefing up your emergency fund.
Channelize any lump sum inflow into your emergency fund
Putting aside lump sum cash inflows perhaps a bonus payment, refunds, premiums, security deposit receivables, or cash gifts that you receive on eid. These can be channeled towards the goal of creating an emergency fund at the earliest.
Borrow From the Future
Take the amount you’re investing into your retirement plan (if you have one) and split it between savings and retirement investing until you reach your emergency fund goal.
When saving, draw a line between emergencies and everything else.
Once a reasonable threshold of emergency savings has been achieved, it would be a wise idea to begin another savings account for irregular but inevitable items, such as car maintenance, vacations, and clothing (Click here to check out our article on sinking funds).
Where to park your emergency fund?
Preferably a savings account or an investment plan with a high interest rate and easy access. Since an emergency can strike at any time, quick access is crucial. The account should be separate from the bank account you use daily such that you are not tempted to dip into your reserves.
If you’re Not Saving for Emergencies-Focus on Developing a Saving Habit.
When you first start to save for emergencies, focus on building a habit rather than focusing on an amount you “should” have saved. Building a habit can help kick-start your saving mindset, regardless of the amount of money you’re putting aside. If you’re ready to create your emergency fund, you’ll need to find the money to save. The first step is budget. (Click here to check out our article on budgeting).