Financial Planning
Emergency fund without pausing your investments? Yes, it’s possible
Discover smart ways to build an emergency fund and create a security blanket for yourself without compromising on your investment strategy.
Key takeaways
- Set aside an amount equivalent to 6-9 months of your monthly expenses to dip into during emergencies.
- Ensure the emergency fund is always stored in a safe and readily accessible option such as a Savings Account.
- To inculcate financial discipline and promote savings, automate monthly savings and investing.
- Avoid overspending, repay debts, and live within your means to create a comfortable financial safety net without compromising investments.
Life is unpredictable, and the only thing you can do is be prepared. Emergencies can crop up without any notice. So, how do you deal with them? To ensure that an emergency does not wipe out your finances, it’s important to create an emergency fund. No matter what stage of life you are in, it's important to always maintain an emergency fund.
As the name suggests, it’s a fund created to deal with adversities and emergencies. Imagine, you have a steady job and everything is going well. However, due to recession or a global healthcare crisis, you lose this job. What will you do then? Instead of getting worried about paying for your needs in the short-term, you get a breathing space if you have an emergency fund. While hunting for new work, you don’t have to compromise on investing. With a little planning, you can invest to create an emergency fund.
If you are wondering “How can you build an emergency fund?”, then read on!
How to create an emergency fund
Do the Math
To start an emergency fund, calculate how much you need. Aim to save 6-9 months of monthly expenses. This amount depends on your lifestyle, finances, and other factors. For instance, if your monthly expenses are ₹60,000, your emergency fund should be ₹3.6 lakhs to ₹5.4 lakhs. Don’t forget to consider unavoidable monthly expenses, such as rent, utilities, EMI, school fees, etc.
The Right Investment
The emergency fund should ideally be accessible. Therefore, choosing the right investment vehicle is crucial. Avoid volatile investments and look for stable ones. Savings Accounts, Fixed Deposits, Debt, Mutual Funds, and Recurring Deposits are common options. However, the suitability of these options depends on your financial circumstances and risk tolerance.
Create a budget such that a portion of your earnings are saved, some go toward an emergency fund, and the rest can be invested.
Focus on Savings
Consistency and financial discipline are crucial when building an emergency fund. The easiest way is to automate savings. For instance, savings can be automatically debited just like EMIs. A portion of your monthly earnings can be directed to your chosen investment option to create an emergency fund. This develops financial discipline and makes you conscious about prioritising financial security.
Comprehensive Insurance
An occurrence that can wipe out savings is a medical emergency. An important aspect of building an emergency fund is to have a comprehensive insurance plan. However, understand that an insurance plan is not a replacement for your emergency fund.
Excercise prudence
The most important aspect of building an emergency fund is to be prudent about what you use it for. As the name suggests, it should be used only in the case of an absolute emergency. So, set some simple guidelines to define an emergency. This can include temporary loss of income, medical, emergency, or essential home repairs.
Three common mistakes to avoid
Now that your question “How do you build an emergency fund?” is answered, avoid these three mistakes when you begin.
Falling into a debt trap
A great financial practice is to repay debt quickly and not take a loan that’s beyond your repayment capacity. Falling into a debt trap creates a vicious cycle resulting in financial anxiety and stress. To avoid this, live within your means.
Not living within your means
A simple practice with far-reaching results is sticking to a budget. Create a realistic budget, follow it, and your emergency fund and investments will be taken care of without any financial stress. Avoid overspending and budget wisely to prioritise your needs instead of giving into wants.
Don’t focus only on Health Insurance
In today’s world, healthcare is becoming steadily expensive. So, having a comprehensive Health Insurance Policy in place is needed. Whether it is you or your loved ones, ensure you have a good policy to sail through any unforeseen medical emergencies.
Conclusion
Having an emergency fund in place is needed for financial stability and security. With careful planning and consideration, you can aim to build your emergency fund without significantly compromising on investments. Now that you know how to build your emergency fund, the next step is to begin. Seek professional help when needed because it is your hard-earned money at play.
Disclaimer: This article is intended solely for informational purposes. The views expressed in this article are personal. Axis Bank and/or the author shall not be liable for any direct or indirect loss or liability incurred by the reader arising from reliance on the content herein. Readers are advised to consult a qualified financial advisor before making any financial decisions. Axis Bank does not endorse or guarantee the accuracy of any third-party content or links included in this article.
Mutual Fund investments are subject to market risk. Please read all scheme-related documents carefully. Axis Bank Ltd. is acting as an AMFI registered MF Distributor (ARN code: ARN-0019). Any purchase of Mutual Funds by Axis Bank’s customer(s) is purely voluntary and not linked to availment of any other facility from the Bank. This content is for informational purposes only and does not constitute investment advice. Past performance is not indicative of future returns. Readers are advised to consult a qualified financial advisor before making any investment decisions. Terms and Conditions apply.
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