Emergency Fund: A to Z step-by-step guide (2023)

An emergency fund is the first step toward financial planning if you are starting your financial journey you must know about an emergency fund.

What is an emergency fund?

Emergency fund as the name suggests emergency means if suddenly anything went wrong for you for that purpose we need to use that money.

This is what the role of an emergency fund is, it is used in emergencies. Don’t use this emergency fund buying any gadgets or wants is strictly prohibited. 😤

Emergency Fund Examples?

Emergency fund examples can vary but some of them are as follows if you lost a job then it will be helpful, medical expenses, home repair, etc can be examples of emergency funds. Again saying you don’t which expenses will come out which is uncertain that’s why we prepare ourselves.

Why is an emergency fund important?

Many of you will say that why we should make an emergency fund I will give you a simple answer in a sentence many people went jobless during the pandemic. After that, they realize that they are getting short of funds for their livelihood.

So if anything uncertain happens like that in the upcoming future and if you have an emergency fund then there is a high probability that you can sustain uncertainty easily. I think you are smart people you will make an emergency fund after going through this article. 💯

Things to keep in mind before building an emergency fund

1. You can’t use this emergency fund for your desire I think I told you once, no problem it’s my duty to remind you if you are doing something wrong.
2. Before investment, you should have at least your emergency fund because I know the investment is important and your protection is also important that’s why you have to have a first emergency fund then after that, you can go with your investment.

How to create an emergency fund?

Well, basically to build an emergency fund at least 6 to 12 times the monthly expense you need. Hold on I am breaking it down into simple steps don’t worry.

1. Know your monthly expenses
2. Multiply your monthly expenses by 6 or 12 month
3. The number you will get will be your emergency fund amount

Let’s take an example to understand more clearly if a guy who has monthly expenses is around 30K Rs per month and if you want to make an emergency fund of 6 months so he will multiply 30K Rs by 6 which will be around 180K Rs. He needs to build an emergency fund of rupees 180K Rs. I hope you got it.

I have some tips so that you can build your emergency fund

1. Pause investment and start making your emergency fund first
2. If you are doing extra unwanted expenses do stop it now and try to save that money and make your emergency fund
3. If you get some extra money from anywhere whether you got a birthday gift or anything whatever extra bonus and put that money in your emergency fund
4. Do some side hustle I know it will be hard and challenging because after working 12 hours you hardly get the time. But trust me guys no one is coming to help you out you have to stand up for yourself so you have to do some work to generate the extra amount of money to build those emergency funds
5. Keep a small amount of money from your paycheck every month

How much emergency fund should I have?

There is no particular answer to this question because every person has his own desires, wants, and expenses. So if anyone is saying that you should have at least that much amount of money in the emergency fund.

That means that they are telling you that don’t know anything about finance because of personal finance. It varies from person to person depending on the needs, wants, and so on.

So there is not a perfect hard and fast rule that everyone will apply the same rule and will get the same result no never ever. I can help you to know your emergency fund and what you will actually need just follow the steps that I mentioned above that 3 points I am definitely 100% sure that you will get it perfect answer if you had done your calculation in the right way.

How much money to save for an emergency fund?

If your emergency fund number comes out to Rs 180K. In that scenario, you should have to save Rs 10K every month and I know it will take up to 18 months to create that. But you have to do that.

Where to keep an emergency fund?

Either you can keep your emergency fund in a saving account or a liquid mutual fund. We have to keep an emergency fund where if by chance we want that money instantly we should get that we don’t have to wait for a long time. You have to keep in mind.

You don’t have to go towards where you will not get good results because if you want you can do it but when you will do FD and you never know when you need an emergency fund and for that if you broke that FD you have to pay the penalty so you have to keep an eye on that also.

Where to invest emergency fund?

So Saving accounts and liquid mutual funds best options for anybody. Because liquid mutual funds don’t have an exit load and you get your money within 24 hours so that’s a good idea but I highly suggest doing your analysis before keeping money anywhere.

Note:- An emergency fund should be risk-free so keep this in mind.

Where not to keep an emergency fund?

1. Gold
2. Stock
3. Cryptocurrency
4. Real Estate

Keeping the point emergency fund should be risk-free because of that factor I had mentioned all that four ways to avoid during emergency fund.

FAQ’s

Read More:-

1. Money management
2. 50 30 20 Budget Rule
3. How to become a millionaire
4. Reasons for leaving a job

Thank you for reading the article. I hope your financial journey goes smoothly.