What is an Emergency Fund? Before building the emergency fund, let's first know what it is. Emergency Fund is nothing but a rainy day fund, which means it is the fund you keep aside for unexpected difficult situations, i.e, it is a contingency fund exclusively built to tackle unforeseen events and situations requiring urgent financial commitments. The emergency or backup fund is built by putting aside a part of your income to tackle unexpected expenses without disrupting your financial goals and straining your cash flow. Why is it important? An emergency or backup fund is your safety cushion; you can fall back on it in times of crisis – unanticipated and unplanned situations – for meeting your financial shortfalls. There can be numerous situations where we can use these funds like: 1- Medical emergencies 2- Job loss 3- Death in the family It gives you some level of freedom, helps you from not taking bad decisions like piling on more credit card debt or taking out loans. How to build? Saving up $500 suddenly may seem like a daunting task. This is the reason why you need to break it down into smaller goals. When you save, the mantra is to start small. Otherwise, you’ll be setting yourself up for failure. Say you want to save $500, break it down into smaller pieces of say $25 per week. Now, this doesn’t seem so difficult, does it? If you put aside $25 a week, in less than 6 months, you’ll be able to reach your goal of $500. But now the question would be, where do you find this $25 from? Here are some ways in which you can build a healthy emergency fund starting today: Determine the fund amount you need Choose the right investment options Automate your investments Set a goal Before you do anything at all, decide how much money you want in your emergency fund, say, six months from now. Once you decide that, as mentioned above, break it down to achievable pieces. Decide on a specific number per week or month, whichever is easier for you to keep track of. Knowing this number will also help you decide how much spending or what expenses you need to cut down on to meet your goal. Write your goal down. Goals that you write down are 52% more likely to be successfully achieved. Tip: You could set your savings goal on Wallet. This will make savings much more easier as Wallet will suggest how much money you need to save every week/month to achieve your goal. It will also remind you to move your savings to your emergency fund. Click here to learn more. Track your money Now that you know how much you need to put aside every month, you need to know where to take it from. For this, you need to know what your money is doing every day. The best way to know this is by tracking your transactions, if you don’t already do this. Tracking helps diagnose where the issues in your finances lie. It will give you a clear picture on what is standing between you and your saving goal. Tip: To quickly get an idea of your finances, Import your transaction history to Wallet. Click here to learn more. Find ways to add to your savings The best way to save is by cutting down on unnecessary expenses and transferring that money to a different savings account. But what if you just can’t cut down anything from your budget. Then, look at other ways in which you could add to your savings. We’ve spoken about painless and small ways of adding to your savings earlier by doing things like keeping a change jar, raiding your pantry, practising no-spend days etc. Small things like using a list while shopping and so on can do wonders for your finances. Find your own ways to add to your emergency fund. Tip: Some people actually set out to declutter their homes and sell off what they don’t need to give a good start to their emergency fund. Check around your home and see if there’s anything you’d be better off without and let it go. Create a separate account It is best to keep your emergency fund as far as possible, so that you don’t dip into it to finance your day-to-day whims, but near enough for you to use the money in times of emergencies. Separate your savings to a new bank account. This will allow you to look at it as a different source and not be tempted to use it for other things. Then, set up an automatic transfer of the amount that you decided upon. As long as things happen on their own, your savings will grow without much effort. Find ways to earn more There are only two ways in which you can increase your savings. Either by spending less or by earning more. If you’re left with nothing to scrape off from your spending, it’s a signal that you may need to earn more in order to save enough for your emergency fund. Negotiate a raise or take up side gigs, at least for a short period of time, to save up a good enough fund. Finally… Make sure that you don’t spend this money on something that is not an emergency. An emergency is something that either brings in a huge unexpected expense, or renders you incapable to earn any more money. This means that your car insurance is not an emergency. This is part of an expense which you should have planned for. A forgotten anniversary is also, thus, not an emergency. Nor is it an unplanned weekend getaway. Create a different savings account to save for these things like travel, huge one-time payments and gifts. Else, you’ll never end up building a good, healthy emergency fund. An emergency fund will empower you and grant you the freedom to make good decisions in the time of a crisis. So start building your emergency fund now. Wallet – system for your financial health Wallet is available for you worldwide with over 10,000 bank integrations. It has over 5,000,000 downloads and 400,000 active users. You can be one of them! Buy a yearly plan with a 50% discount right now! Find the app on the App Store or Google Play and explore it! Or start by signing up for our WebApp today. How much money should one keep in an emergency fund? Financial experts recommend having a backup fund that can cover three to six months of your living expenses without any income. The recommended amount to get started with a beginner emergency amount is ₹1 Lakh to ₹1.5 Lakh. Some experts recommend having as much as your yearly salary or more in your emergency or backup fund. That said, every person has different financial needs, and it depends on their lifestyle, income, dependents, and unavoidable monthly expenses. Hence, the right backup fund amount differs from person to person. When calculating the emergency/Backup fund amount, it’s important to consider the minimum amount you need to get through your monthly expenses. These expenses include electricity bill, loan repayments, home loan, rent, etc. Given the current pandemic situation we are in, 6 months to 1 year of basic living expenses stashed as an emergency fund is a must. For example, if you earn ₹30,000 a month and ₹15,000 is your basic living expense, then your backup fund should be in the range of ₹60,000 to ₹1,00,000. You may even divide your emergency fund into 2 categories: For long-term goals This fund can be used for huge emergencies like a major natural disaster or a sudden medical emergency. Invest this fund in financial instruments that allow you to earn slightly higher returns and which can be liquidated within a couple of days’ notice. For short-term goals This is your rush-to fund when in an emergency. Invest this fund in saving vehicles where immediate accessibility and not high return is your priority. Things to remember while saving emergency funds When investing in creating an emergency fund, it is best to choose the right investment options that are: Easily accessible Earn higher returns on your savings Safe from market fluctuations Stable and reliable Where to Park Emergency Fund? Some of the best investment options are as follows: Savings Account: You can easily open a savings account with a bank to keep your emergency fund. Although a savings account guarantees easy liquidity, the returns of the invested funds are low. Chit Fund: Parking your backup fund in a chit fund ensures quick liquidity as well as good returns compared to a bank savings account. For safe and secure investment, invest using digital chit fund app like The Money Club. Mutual Funds: If you have healthy savings, stable income and are in a position to afford market fluctuations, you can consider investing in mutual funds. ROI can be high, but it is a risky investment. Fixed Deposit and Recurring Deposit: These investment options offer quick liquidity and a higher interest rate than a savings bank account. But, pre-withdrawal from these accounts can attract a penalty.