I’m sure you know what happened to my car right? If you have been following me for a while, you must have read about how I bought a car that’s not so good and I had to face lots of troubles just repairing it.
My car broke down several times and I had to spend a fortune to repair it. And like most of you, whenever it broke down, I didn’t have a “fortune” saved in my bank so I had to borrow money. That’s also on my credit card! One thing credit card companies are good with is the interest rates. Usually, they charge about 24% as the interest rate, one of the highest in the market. So within no time, every month I was paying a big amount to settle my credit card. It took me a long time to recover from it (still recovering!)
Whether you like it or not, things can go south in your life. Suddenly you can fall a sick. Or your phone gets stolen. Maybe you get kicked out of your job. Or the company you work goes bankrupt. In such horrible times, you need a cushion to fall back to. That’s going to be your emergency fund.
What is an emergency fund?
An emergency fund is a bank account with money that is enough to get you out of a sudden expense such as car trouble, medical expenses, or a financial crisis such as losing your job. It’s simply a bunch of money you have saved to get you through a rough situation in life.
Why do you need an emergency fund?
Let’s imagine the worst case scenario. For some reason, you lose your job. How are you going to cover your expenses for few months until you find a job? The only way is to borrow some money and most likely you will turn to credit cards or high-interest rate loans.
If you want to improve your financial situation, you need to get out of debt and one of the best ways to get out of debt is not to get into more debts.
Imagine if you have a bunch of money saved in an account for a rainy day. When an emergency happens, you can simply withdraw that money and use without needing to borrow. This can help you to stay out of credit card or high-interest debts in the long-term. And most of all, it will be a relief. That’s why you need an emergency fund.
How much should you save in your emergency fund?
There is no hard and fast rule to figure the amount you need to save. One good rule of thumb is to save at least 3 to 6 months of your monthly expenses. In case if you lose your job, this will help you to pay your bills.
If that’s too much, you can always start small. The most important thing is to save at least something so that you’ll have enough when something bad happens. You can start by saving at least Rs.1000 – Rs.5000 month. That’s better than having nothing at all.
It doesn’t matter how much you save as long as you save something. The habit will lead you to save more. If you’re starting small, increase the amount gradually. You can always save the additional amount you earn. You can even cut back your unwanted expenses (clothing, dining) so that you can save a little every week.
How can you create your emergency fund?
Follow these steps to create an emergency fund.
- Figure out how much you need to save
Write down your monthly expenses and decide how much you’re going to save monthly. Remember. If you can’t save a lot, that’s fine. But come up with a number. That’s going to help you stick with the plan. I’m going to save Rs. 4000 as a start. I can always increase it later. Try to come up with a number and stick with it. That’s more important than the amount you actually save.
- Create a different account for your emergency fund
You need to have a different account for your emergency fund. Why? Otherwise, whenever you need money for nonemergency needs, you’ll use that money. My suggestion is to open a separate account just for your emergency fund.
But keep in mind that you need to access this money in an emergency. So make sure you can easily withdraw your money.
- Try standing orders
Do you ever think of brushing your teeth in the morning? No. As soon as you wake up, you walk to the bathroom like a zombie and start brushing your teeth. You have brushed your teeth for so long that it has become an automated habit. You don’t even have to think about it. You just do it.
You can apply the same principle to saving. Make saving a habit by automating it. Create a standing order so that whenever your salary/income is deposited to your account, an amount is sent straight to your emergency account without even your knowledge. Then you don’t have to go through the trouble of withdrawing your money and depositing in your emergency account. Everything is automated for you.
Talk to your bank about standing orders. It’s super simple.
- Make alternative income
One way to increase your emergency fund is, making more money and saving them. I still do assignments to make money! I’m sure you can find some way to make a few bucks. Any additional amount you make can go straight into your emergency fund.
- Cut down your expenses
Even though we don’t realize, we spend a lot of unwanted things. If you’re dining out 3 times a week, you can cut that down to one. You can reduce your expenses for clothing. Start tracking your expenses to figure out where you’re spending more money and try to cut down and save it in your emergency fund.
- Monitor your emergency fund
Peter Drucker said, what gets measured gets done. This is so true. Monitor your fund to see how it grows every month. See if you’re hitting your monthly saving goals. That’ll inspire you to save even more.
You need to know your emergencies!
Your emergency fund is named as such because you’re only supposed to use it for emergencies. So make sure to use it only for emergencies. The car insurance you forgot to pay is not an emergency. Or that vacation you’re planning to go. An emergency is an expense that occurs suddenly without your knowing. Any expense you know that’s going to occur in the future is not an emergency. So use your fund wisely.
What happens if you don’t have an emergency?
Now isn’t that wonderful? If you don’t encounter any emergencies and if you have created a sufficient fund, you can stop saving or better yet, you can consider it as an investment and keep on saving.
Rather than saving in a usual bank account which doesn’t pay you a high-interest rate, you can try saving plans such as NDB Wealth Money Plus which will give you a higher interest rate than bank deposits. They also have the flexibility of withdrawing your money anytime with no penalties at all. Then your emergency fund will get a high return at the same time having the flexibility to use it for an emergency.
Well, now you know what an emergency fund is. Trust me when I say this, you need some money saved for a rainy day. It will save you from lots of painful troubles. And always consider buying a great car!
Did you like this post? Comment below and let me know. If you’re struggling with anything related to personal finance or investing, add a comment. We’ll make sure to solve them in the future.
Disclaimer: NDB Wealth Management does not sponsor this post. The reader is advised to follow the recommendations wisely and the writer or Jump Pvt. Ltd is not responsible or liable for any recommendations on this post.
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