Importance of Emergency Funds and How to Build Them?

Uncertainties are part and parcel of life. In one moment, you may be enjoying a vacation with friends and in the next moment, you may find yourself dealing with a medical emergency. Emergencies never come knocking on the door. It is true that such circumstances can take a toll on you financially and mentally, which is why it is significant for every individual to be prepared for it. There’s one way you can save yourself from the situation and that is by building an Emergency Savings Fund.

What is an Emergency Savings Fund?

An Emergency Savings Fund is a separate Savings or Bank Account that is used to cover unexpected expenses. Many people may consider it for paying for a child’s school fee, vacation or tuition fee. However, the very purpose of opening such a bank account is to ensure a safety net whenever you are trapped in an unforeseen situation or emergency.

How to build Emergency Savings Fund?

There are different strategies to get your savings started, below are some:

• Open a High Interest Savings Account:

Take the first step towards building an Emergency Savings Fund corpus by opening a high interest rate Savings Account. AU Small Finance Bank offers a higher interest rate on Savings Account along with a Monthly Interest Payout benefit. Apply now.

• Take advantage of one-time opportunities:

This specifically means whatever incentives or bonuses you receive from your employer should be transferred to an Emergency Savings Fund account. You can even transfer your tax refunds.

• Automate savings:

Fixed income earners can set up automatic savings to create an Emergency Savings Fund. You get to decide how much and how often, but once you have it set up, you’ll be making consistent contributions to your savings.

Read More: Liquid Funds Vs Savings Accounts

Why do you need an Emergency Savings Fund?

1. Medical emergency:

In case of a medical emergency, you wouldn’t be forced to take a loan from friends or a bank. You can rely on the emergency fund to cover unexpected expenses.

2. Job loss:

Losing a job, especially if you are the only earning member in the family, can be a huge loss. But if you consistently save towards your Emergency Savings Fund, you can deal with the situation without any worries. Experts suggest that an Emergency Savings Fund should comprise at least three months of your monthly salary.

3. Unwanted expenses:

You can use the funds to cover unwanted expenses. If you urgently need funds and have important financial obligations to meet, you can use the funds to pay your loan EMIs, insurance premiums or losses incurred due to natural calamities.

How much should be in your Emergency Savings Fund?

The amount of building an Emergency Savings Fund may vary from individual to individual. This is because every person’s lifestyle needs, wants, expenses, etc., are different. It totally depends on income, expenditure, and existing savings. To begin with, you can divide your Emergency Savings Fund into two categories:

• Long-Term Emergency Funds: To build this fund, you can invest in financial instruments that offer higher interest rates but are less liquid
• Short-Term Emergency Funds: For short-term needs, you can choose to invest in accounts that offer decent interest earnings, but they are easy to liquidate in an emergency. To some extent, they can help you cover losses till you gain access to long-term emergency funds

Key Takeaways:

• Building Emergency Savings Fund is significant as it gives you peace of mind in case of an emergency
• There is no right or wrong time to invest in an emergency fund. Every individual should create it after evaluating certain parameters
• While saving for an emergency, you should also review & adjust it at important milestones in your life

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