Emergency Fund: How to Build an Emergency Fund?

2024-08-02

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An emergency fund is built for emergencies. It is not a piggy bank. You are not to tap into it for a new car or a new house or a new anything. An emergency fund is for things that you did not plan for. This can include things like a natural disaster, job loss, serious illness, car repairs, or anything else that you did not plan for. Having an emergency fund is one of the first steps of your financial planning.

How much Emergency Fund to Have?

The most ideal way to build such a fund is to start small and then gradually increase the amount that you contribute to it. The amount of emergency funds you should have depends on your lifestyle and your income source. If you have a stable income source and your job is not at risk, you can have a smaller emergency fund. If you are self-employed or your income is unstable, you should have a larger emergency fund.

Some factors that may help decide how much to keep in an emergency fund include:

Your monthly expenses
Your income
Your debt
Your job security
The stability of the economy

A good rule of thumb is to have at least three to six months of living expenses saved in your emergency fund. This may seem like a lot, but it is important to have a cushion in case of a financial emergency.

Learn about contingency planning.

Some other pointers that you may want to consider when deciding how much to keep in your emergency fund include:

How much financial cushion do you feel comfortable with?
Your ability to cover unexpected expenses with credit
Your overall financial stability

How to Invest your Emergency Funds?

There is no single answer to the question of how to invest your emergency funds. The best way to invest your emergency funds may vary depending on your individual circumstances.

However, some general guidelines can help you make the best decision for your situation:

Keep your emergency fund in a savings account or fixed deposits so that it is easily accessible if you need it.
Invest in safe financial instrument that are not affected by short-term volatilities in the market. Else your money might be eroded when you need it the most
The most important thing to remember when deciding how to invest your emergency fund is to make sure that the money is readily available whenever you need it.
You should not invest your emergency fund in a long-term investment, such as a retirement account, that you cannot access quickly if you need the money.

In a nutshell, you should look for avenues to invest your money in instruments that are:

Highly liquid
Safe
Low cost and
Easy to retrieve

Investment Options for Building an Emergency Fund

There are a few investment options that you can consider for your emergency fund.

1. Fixed Deposits:

A fixed deposit is a safe investment option. You can invest your emergency fund in a fixed deposit starting from a term of 7 days.

2. Savings Account:

You can also consider saving your emergency fund in a savings account. The interest rate on a savings account is lower than that of a fixed deposit.

3. Liquid Mutual Funds:

Liquid mutual funds are one of the best options for your emergency fund. These funds offer high returns and are very liquid.

4. Short-term Debt Funds:

Short-term debt funds are also a good option for your emergency fund. These funds offer higher returns than fixed deposits and savings accounts.

5. Recurring Deposits:

The interest earned on recurring deposits will be added to the principal amount and the total amount will get reinvested. The interest rate on recurring deposits depends on the banks and the interest rate ranges from 6.35% to 7.35% per annum.

6. Credit Cards:

If you have a credit card and you are in an emergency where you need to pay bills at the hospital or elsewhere, you may use your credit card. If you must pay for incidental expenses, in cash, you may withdraw cash from your credit card account

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Solidifying Emergency Protection with Life Insurance Plans

We know that life is unpredictable and sometimes unfortunate events happen. That’s why you need protection for your family and for those you care about. Insurance is the only comprehensive solution for mitigating risks to health and life. Some must-have insurance, in your emergency fund, to financially safeguard yourself:

1. Term Insurance:

In case of your unfortunate, untimely demise, your family will receive the sum assured from your term insurance policy. You can:

Divide the sum assured into a lump sum and a growing monthly income for your family
A lump sum amount helps them pay off their debts and save for future goals
Regular sum takes care of the regular expenses
With the annually growing income, they can keep up with the inflation

2. Health Insurance:

Healthcare is expensive and getting costlier by the day due to inflation. Having a family Mediclaim policy is useful to pay hospital bills, should the need arise

Mediclaim or family floater policy pays for hospital bills
Critical health insurance will pay a lump sum in the case of life-threatening illnesses like cancer, etc.
If bought as a rider with term insurance plans like iSelect Smart360 from Canara HSBC Life Insurance, it will also help you continue your life cover without further premium payment in case of a critical health claim.

3. Accident Insurance:

While minor accidental injuries can heal and you can quickly return to your normal working capacity, more severe injuries can shake your financial foundations. Thus, the accidental disability insurance:

Get financial support in the case of a permanent disability
Emergency hospitalisation support
Additional financial assistance to the family in the case of accidental death
Purchase as a rider with term insurance to add premium waiver option for the life cover in the case of disability

Also Read - Temporary Disability Insurance

An emergency fund is a savings account that is used to cover unexpected expenses, such as a job loss, medical bill, or car repair. The funds can help provide financial stability and peace of mind in the event of an unexpected event. Saving money for emergencies is a great idea. At the same time, look at insurance because some expenses are huge, and insurance can help you build that cushion.

Disclaimer: This article is issued in the general public interest and meant for general information purposes only. Readers are advised to exercise their caution and not to rely on the contents of the article as conclusive in nature. Readers should research further or consult an expert in this regard.

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