Before you start investing, get your emergency fund. This is crucial. The Emergency fund is the fund that is used for any emergency. This fund serves as a financial safety net for unpredictable circumstances set aside for some amount for usual or unpredictable circumstances. This fund should be designed for only emergency conditions that you can’t predict like Accident, death, injury, or illness. Like Insurance, Insurance is one of an emergency fund. And others like you lost your job or something like that you can’t make money regular which is now you earn now. So, during an emergency what’s the case against financial protection?
Through an insurance product, that is a form of an emergency fund. So when do you need fund? Let’s assume, you lost your current job and it took you 3 months, maybe 4 months to find another job. And that is why you need an emergency fund for something that you cannot plan for, but you know may happen.
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Recommended Fund Size
It is advisable to save enough to cover 6 to 12 months of living expenses. This will help you manage your finances during periods of unemployment or unexpected expenses.
Especially when you’re very young and if you are very young and you’ve just started your earning career. Just in case of any emergency you have some cushion. During this time if you are not earning, but you are buying. That is why you need emergency funds. You can make it with little effort.
To calculate your emergency fund
Monthly Expenses: You need to list all necessary expenses like rent or EMI, monthly bills, groceries, or other mandatory things that you have to require. Factors like your desire for a hotel stay, outside food expenses clothes, and buying a car this all be cut or delayed.
Calculation: Multiply your monthly expenses by 6 for a 6-month fund and by 12 for a 12-month fund.
The idea is so simple, that your monthly expense especially needful multiplied by 6 becomes your 6-month emergency fund. And this expense multiplied by 12 is your 12-month emergency fund.
So here are 3 tips from my side to build an emergency funds.
Building Your Emergency Fund
Pause Investments: We have to pause all investments. This is actually the right thing to do. Yes, you have. Because you are not protected now. And investment will wait but emergency not, so think about it carefully.
Minimize Personal Expenses: Till you don’t get your emergency fund, we will minimize your personal expenses. Of course, we will not get all personal expenses. Do not go out as much as you do. Do not buy those things that you can postpone for later. This is necessary. This fund is the basis for your risk protection.
Utilize Lump Sums Wisely: Anytime, in any way, if you get a lump sum amount. Like bonus maturity of FD or your any lump sups amount.
Now you have to open other bank accounts. Because it’s required. So now you have your account and your amount that it doesn’t it with a disciplined manner investment. The point is you have to be disciplined around this.
Now you have an emergency fund, now biggest Question is where to keep it
Where to keep emergency funds?
A balanced approach to managing your fund includes
There are 3 components
10% in Cash component: Keep a small amount readily accessible for immediate needs. In this case, you do not have to carry your wallet but you have to at least 10% amount in case form which you get easily when it an emergency.
20% in a Bank Account: Maintain funds in a savings account for easy access. So in the bank, the rate of savings is absolutely fine. If you have an emergency fund, you can’t get it. Inflation is not the same. So during that time, this fund can very well serve your purpose.
70% in Liquid Mutual Funds: Invest the majority in liquid mutual funds, which offer quick access to funds without exit loads and can grow at rates that keep pace with inflation. Liquid mutual funds are basically fixed-income funds.
The benefit of liquid funds is no exit load and you can get it when you require it will transfer within 24 business hr to your account.
During this time you have to pay with a credit card and when the money is credited to your account you can manage your CC bill cycle.
Conclusion
An emergency fund is essential for financial stability and peace of mind. By following the 10-20-70 rule and being disciplined in your savings approach, you can effectively prepare for unexpected financial challenges. This strategy not only secures your present but also sets a strong foundation for future investments.
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