The global pandemic that started in 2020 continued to affect millions till 2021. The whole world was under lockdown. Several lost jobs, dealt with salary deductions, and faced the worst financial crisis. What never stopped was living expenses. As we know that life is unpredictable, and savings for emergencies will help you to cope with these situations.
The need for emergency funds is not just limited to covering unexpected scenarios but goes beyond that. Let's understand why it is so important and what are the best investment options for emergency funds.
An emergency fund is an amount that should be kept aside to meet your mandatory expenses without getting involved in mortgaging the assets, last-minute loans, or depending solely on credit cards.
To have an emergency fund ready, it is important to understand your necessary expenses. These include basic day-to-day requirements, food, rent, medicine, bills, and anything which is an indispensable part of your life.
Emergency funds are quite different from other investments as those are likely to support you during financial emergencies. So, you should consider a few things before selecting your emergency funds:
Staying prepared for sudden emergencies by securing future finances through emergency fund planning is important. Here are the important factors to make you understand why should you have an emergency fund!
Emergency funds are a crucial corpus for unexpected expenses. It is the money you can rely upon during crisis hours, for unplanned and unexpected times. You need to plan it to overcome unforeseen financial expenses that may come at any time.
Medical emergencies are such unpredictable situations where you don't have an option but to spend money for treatment. People who have seen medical emergencies are of two types: the first category of people who panic about collecting such a big amount suddenly. The second category of people is those who have a sigh of relief because they have accumulated enough funds for situations like these.
Medical treatment comes with big expenses. Nothing can be more regretful than seeing your loved ones in pain due to a lack of funds. In such a situation, emergency funds work as a miracle.
Preplanning is the key to survival in times of unemployment and layoff. It allows you to have enough funds to survive for a few months without earning. During this time, you can prepare for your next job without worrying about your expenses. It is best to have funds that could cover your few month's expenses.
Emergency funds are a significant way to ensure your financial security, apart from saving money for retirement. It also gives you the freedom to switch a job if you feel stuck in a workplace that is not good. You could anytime decide to quit your unsatisfactory job without worrying about debt and expenses.
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If you invest or are a long-term investor in equity, you are familiar with the market’s ups and downs. Events like global uncertainty, inflation, political crisis, etc. bring the market down significantly. This can be an opportunity to refuel your investment with your emergency funds. You can use a part of your fund to invest in equity. This small step can make your investment grow significantly in the longer horizon.
Emergencies are one such situation where you can't have enough options to get money from interest-free sources. This invites high-interest loans which will affect major years of your life. Having funds will allow you to get through the situation easily without having to pay high interest on emergency loans.
Emergency funds can be a quick fix to vehicle damage or a car accident that you can pay then and there rather than using insurance. It will be used for the unanticipated cost of having a vehicle or annual maintenance. Using the emergency funds to pay these will allow you to maintain your insurance at the same monthly fee which is not very easy to maintain.
An emergency fund will save you from stressful days and help you escape risky debt cycles much more quickly.
Emergency funds provide a strong cushion to your financial goals. Here are a few promising ways to get started with building your emergency funds.
Preparing a plan and working on it is the best way to reach your financial goals. There are Emergency Funds Investment Options. Select the one that resonates well with your finances.
An emergency fund can be in any form. It can be as small as treating car damage or as big as coping with a job loss for months. The exact amount for you relies on your financial conditions.
The first step is to evaluate your monthly expenses that cannot be cut off. These include insurance payments, household expenses, and children's education. Calculate it for a few months to get an estimate. This can help you differentiate between your essential and non-essential spending. The number of months can be determined by understanding how secure your job is.
No one knows the tenure of an emergency or the bandwidth it comes with. The savings for emergencies should be such that you could pay your credit card dues, EMI's, and household expenses for at least 6 months. It should be enough for you to pay your liabilities for a few months without having a job in hand.
For example, let us suppose that your mandatory expenses are covered under 40,000 per month. In this case, you can take an estimate of 40,000×6 which is 2,40,000. Your emergency fund can be between 2.5 lac to 3 lac. This also depends on the number of earning members in the family.
In the case of a single earning member, you need to save more to cover the expenses of every dependent member of the family. If the family has two earning members, things will get much easier. Both the members can save up to fund emergencies.
An emergency fund should be a major part of your financial life. Every person should have savings for emergencies or unexpected times. Saving bit by bit will help you decide whether you will be going into debt or sailing through a financial storm. However, saving too much by cutting your important expenses is not a good idea. Make sure to be smart with the savings as these have a useful purpose.