Why and how to plan for an emergency fund?

As much as we would like to, we can't predict what will happen in the future. Riya had a fantastic job, and everything was going well for her. But she lost her job when her company decided to downsize. All her plans came to a halt, and survival became a challenge. This is when she understood the significance of saving money for unexpected situations.

Emergencies can be defined as events that are serious and require immediate action. While very little can be done to avoid them, having an emergency fund can take away some stress and help face the situation.

What is an emergency fund and why do I need it?

An emergency fund is your safety net. When things don't go as expected, and you need money to cover unexpected expenses, this emergency fund can be your saviour.

An emergency can be anything that requires immediate action, be it major repairs to a car or house, a job loss, or something as grave as a medical emergency. Having funds that are liquid and can be withdrawn without much hassle is what an emergency fund means.

In the absence of an emergency fund, even a small unexpected financial challenge can cause significant financial setbacks that have long-lasting consequences and potentially lead to a debt trap.

How much should I save in an emergency fund?

The answer depends on your lifestyle, dependents, income, and necessary expenses. To determine your emergency fund amount, start by calculating the minimum funds necessary to cover unavoidable monthly expenses. Once you have a clear picture of your monthly expenses, aim to build a cash reserve that can sustain you for six to twelve months without any income. Let’s say your monthly expenses are ₹40,000, then you should aim to save around ₹2,40,000 to ₹4,80,000.

You might feel overwhelmed, especially if you are starting from scratch, but don't worry! You can reach your emergency fund goal by consistently saving a portion of your income every month. The key is to get into the habit of saving regularly, no matter how small the amount.

Also Read: [5 mistakes to avoid with your emergency fund]

Where do I put my emergency fund?

When it comes to parking your emergency fund, you want to keep it somewhere that's easily accessible, safe, and can even make you some extra cash. Good options for this include a savings account, recurring deposits, fixed deposits, and debt mutual funds like liquid funds. These options offer the right mix of being able to get your money when you need it, low risk, and the potential to earn some interest along the way. So, choose an option that suits your needs and gives you peace of mind in case of any emergencies.

If you are looking to build an emergency fund, Axis Bank offers a range of products that can help. For instance, the Axis Bank savings account has customised options with different features. A Recurring Deposit can help you build your emergency fund through systematic deposits every month. If you prefer a fixed deposit, then Axis Bank offers the most competitive FD interest rates. It also offers investment options in Liquid Funds which can be invested in a few clicks.

In a nutshell, an emergency fund is not an option but a need. It should be a fundamental part of your financial planning. So, do not delay in setting aside money for an emergency fund. Get started today!

Disclaimer: This article is for information purpose only. The views expressed in this article are personal and do not necessarily constitute the views of Axis Bank Ltd. and its employees. Axis Bank Ltd. and/or the author shall not be responsible for any direct / indirect loss or liability incurred by the reader for taking any financial decisions based on the contents and information. Please consult your financial advisor before making any financial decision