Save For Financial Emergency With A Contingency Fund
2020 is proof that nothing goes according to our plans, and emergency can strike anytime. From unforeseen situations to losing our job out of the blue, it can all happen within months, and we are left fending for ourselves. If you have been at the receiving end of a series of unfortunate incidents this year, you might find solace in building a robust emergency fund, that is if you don’t already have one.
If you do, then in terms of financial independence and security, you are an outlier. But for others, there is still time and better late than never.
Guide To Building An Emergency Fund
An emergency fund, also known as a contingency fund is like a buffer account where you can save money that will help you tide over a financial crisis. From pay cuts, substantial medical bills to car fixes, there are a lot of murky situations which can quickly come under financial emergency.
Thus, an emergency fund is essential in these unprecedented times where the future is uncertain. Your emergency savings fund is not like your regular savings account and is over and above it. After your deductions for your investments like RD, FD and such, the money you save in an altogether different account is what counts as an emergency fund because this is the money you will reach for when a financial crisis happens. Now, that we have established what an emergency fund is, let us understand how much do you need to put aside and where you can create one.
How Much Do You Need To Save In Your Emergency Fund?
Your contingency fund ought to have money equivalent to at least your six months’ worth of salary. If you are feeling ambitious, you can go for nine months or even a year. But six months is minimum because that gives you enough time to recuperate from the emergency and build back your income. Moreover, an emergency fund ensures you not going in debt by excessively using your credit card or borrowing.
Calculate your income, investments, rent, essential spending (like house help, groceries, and other essentials) and multiply this amount by six, nine or the number of months’ worth of emergency fund you want to create. Now you have an end goal to reach for your emergency savings.
Another point that you should keep in mind is that it is always a good idea to provision 3-6 months of Home Loan EMI or home keep expenses so that you can maintain your lifestyle and bank commitments, even if you do not have a paying job for some time.
How To Go About Building One?
The next important question is, how do you build one. Keep in mind that once you have the target amount of your savings in mind, you should save gradually to build your emergency fund. It might seem daunting at first; here are the steps you can follow to contribute towards your contingency fund.
Set up a separate account
A no-brainer when it comes to building your emergency savings fund is to create an altogether different account. Because just “saving money” in your regular account will ultimately lead you to overspend and deviate from your end goal of building a corpus for your contingency fund.
Contribute to it every month
Make sure you transfer or put on auto-debit the amount you want to contribute every month to your savings account on the day you receive your salary. This practice ensures you don’t forget your responsibility of building an emergency fund no matter what extra expenses you have in a given month.
Cut down on other unnecessary expenses
This goes without saying, especially if you are unable to save a substantial amount every month. Cutting down on entertainment, eating out and shopping mindlessly will help you save enough money every month to put in your emergency fund account.
This also helps in inculcating a saving habit which is always a good thing given how consumerism rules our life, and we end up hoarding more than we need anyway.
Where To Keep Your Emergency Fund?
An emergency fund is a financial buffer that you create for yourself to cushion against unforeseen circumstances where you might need extra money. Thus, your contingency fund should be built and kept in an easily accessible account. Therefore, creating a SIP or investing in non-liquid assets like real estate or gold for your emergency fund is out of the question.
Instead, you can either start a different savings account which you won’t touch unless there is an emergency or go for a Fixed Deposit or Recurring Deposit which can be liquidated almost instantly, in case of an emergency. Make sure you open this RD, FD or additional savings account after seeing the interest you will earn on each and the amount of time the bank will take to credit your money.
Most funds allow you to liquidate at least INR 50,000 per day and the remaining can be withdrawn consequently.
Once you have made a check-list of all these tasks, set your target goal for your emergency fund, you can start saving and build a corpus that will keep you afloat in dire situations and trying times like a pandemic. Keep in mind that all financial decisions are best taken after a consultation with your financial advisor/ counsellor.”