When you are starting your financial planning, one of the first things you must take care of is create and maintain an emergency fund. An emergency fund acts as your savior and protects you from all unforeseen life events like job loss, medical illness, death of a family member, accident(s), etc.
Financial experts agree on the fact that an emergency fund should be an integral part of your financial portfolio. Hence, you should set aside at least three to six months living expense budget in terms of cash or cash equivalents that could be easily available and accessible. This corpus would help you to deal with uncertainties.
Let us understand more about emergency funds in order to create and maintain it the best way possible.
What is an emergency fund?
An emergency fund mitigates the risks of unforeseen life events through time bound financial coverage. Hence, any emergency fund should be robust enough to ideally cover a year’s monthly expenses, or a bare minimum of six months financial budget.
What are the characteristics of an emergency fund?
- Low Risk: The ROI is often proportional to the nature and amount of risks involved. It is always better to keep the emergency fund investments at very bare minimum risk.
- High Liquidity: Make sure that the liquidity of your emergency funds and/ or assets is high. For instance, if you’re maintaining your emergency funds in a savings account, you could easily take out cash as and when required. But in case, you are investing in government bonds and treasury bills, then you will have to wait for liquifying the investment for at least for one to three days.
- Easy Access: Your emergency funds should always be easily accessible. Hence, if you are putting it into your savings account, make sure you must have a debit card and a cheque book to make the transactions faster and easier.
How to create and manage the emergency fund corpus?
Controibuting a big amount to your emergency fund may be a major challenge for you. However, you could always get started with a small amount and be consistent to maximize it over a period of time. Here we have a few tips which would help you to manage your funds to get it started,
- Identify and cut down your spending on avoidable expenses every month. And divert the funds towards your corpus.
- We often use the auto debit facility to pay our electricity bills, telephone bills, and other expenses. Similarly, you could use the auto debit facility to debit some amount of your monthly income to your corpus, which would help you grow it even faster if you don’t remember it.
- Make proper use of your stock dividends by diverting them to your emergency fund. That will help you get closer to your goal faster.
To conclude, you must count on your single penny that could be saved in your emergency fund. This practice will definitely reduce your chances of borrowing money at a high interest rate in times of uncertain life events and help you emerge financially secure.