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Given the state of the world right now, having an emergency fund is a necessity. Here is everything you need to know about why you need one.
Being financially aware in today’s scenario, is no longer an option. Neither is having an overall financial picture and preparing for untoward contingencies. Unforeseen contingencies never announce their arrival. Hence, it is wise to expect the unexpected and be prepared by building an ‘Emergency Fund.’
Taking into account the current COVID-19, it has wrecked the economy to a great extent and has caused turbulence in all our lives. In such an awful situation, an emergency fund can act as a backbone for several families.
An emergency fund is a distinct fund created by accumulation of money specifically meant to meet unanticipated financial shortfalls. It is a fund one can fall back in times of crisis or for any unexpected circumstances.
These could be rough economic times, loss of a steady, hefty medical costs or indispensable surprise expenses. Adequate preparation for a financial emergency is especially important for low-income households. Few points detailing what an emergency fund is.
Building an emergency fund must be one of our highest saving priorities. This fund acts as a cushion to protect an unexpected financial bomb. It helps us from dipping into our savings and investments. Or plunging into a debt trap.
So, no matter how hard it is to save, it must be created in order to carry a person or family through tough times. It may, to some extent, make an individual feel financially secure and allow them to live a comfortable life.
An emergency fund cannot be built overnight but be done gradually. The corpus can be generated by curtailing some of our non-essential expenses, setting aside ‘found’ money. Other ways to turbocharge the fund is to use the tax refunds or extra income streams.
A good rule of thumb is to have enough to cover three to six months’ worth of necessary living expenses. I believe the spending norm should be followed with a ‘Need to have‘ approach, rather than a ‘Nice to have‘ one. This corpus can vary, depending on the individual’s income, costs, bills, lifestyle, and number of dependents.
Money so saved should be kept in accounts where it is liquid and easily accessible. An automatic bank transfer or a separate direct deposit of a portion of our regular cash inflow will help in accretion of funds in a disciplined manner every month.
The emergency fund is one of the pillars of personal finance. We need to be mindful that keeping the funds in liquid position is meant for a particular purpose and not for high return investment. And need to inculcate the habit of compromising some of our spending. At the end of the day, this is our money which will sail us through some of the toughest financial disasters of our life.
It’s never too late to get started. Looking forward to have a better tomorrow!
Picture credits: Pexels
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