5 Steps to Build a Strong Emergency Fund

Emergency fund saving is a strategy to save some money that can help you to cover your expenses for at least 3 to 6 months in case of any uncertainties. Life is unpredictable and anything can happen at any moment so it is important to Build a Strong Emergency Fund. The job you rely on to get monthly income can be lost due to economic crisis, lay offs or due to your performance.

It does not matter how loyal you are for the company, they can anytime ask you to leave. In other cases, there can be some health issues with you or family members that would need some funds to tackle the problem. This is the time when Emergency funds can help you if you do not have much savings accumulated.

It is important to build a strong emergency fund and this is what we will discuss in this article.

Table of Contents

1. Determine Your Needs
2. Prioritize Savings
3. Explore Different Savings Options
4. Stay Disciplined and Consistent
- FD Interest Calculation Video
5. Consider Additional Strategies

1. Determine Your Needs

The first step towards building a strong emergency fund is to assess and determine your needs.

You need to calculate average monthly expenses that can include groceries, rent, school fees, loan EMI, vegetables, entertainment and other items in your list that you need to sustain and keep life moving forward.

This will also help you to understand what is your month expenses on average, and what are the things you can cut off to reduce your expenses.

2. Prioritize Savings

Once you have identified the average monthly expenses of your house, you need to make a budget and prioritize savings
Generally, for emergency fund saving, you need to save money in low risk saving scheme such as savings bank account, fixed deposit or recurring deposit
You can open a separate saving account as well, and ensure that you don’t have easy access to this saving account, so that the funds are used only in case of extreme emergencies
In case you have a debit card against this saving account, you will be tempted to withdraw the amount for unnecessary spending, which is not intended when we are saving for emergencies

ALSO READ: Savings Account Interest Calculation

3. Explore Different Savings Options

As mentioned above, various saving options can include savings account, fixed deposit, recurring deposit or even liquid mutual fund
Liquid mutual funds can help you to gain extra returns on your savings similar to fixed deposit
The difference is, in fixed deposit you have to pay TDS if interest goes above a limit in a financial year, where as in liquid mutual fund, the profits are taxed only when you redeem the amount from mutual funds
Don’t use high risk schemes such as stocks or equity mutual funds for saving the emergency funds, since you cannot risk this money, even if you get high returns on such schemes
Start small with some amount every month to be saved in the low risk saving scheme of your choice and you can build a strong emergency fund within a span of next 3 to 6 months, after cutting back the unnecessary expenses
The amount in your emergency fund should be equivalent to 6 times your average monthly expenses. The more the better.

ALSO READ: How Recurring deposit works with interest calculation

4. Stay Disciplined and Consistent

Next step is to be consistent in your savings to build the emergency fund. As mentioned above, be consistent for next 6 months to have enough funds in low risk saving scheme
This requires discipline and consistency, after cutting back the unnecessary expenses
Also, once the funds are accumulated, use it only in case of extreme emergencies, and when you don’t have enough funds in your regular savings account
Buying a new smartphone or television is not an emergency, hence the fund should not be used for such purpose
Only in case you or family member is hospitalized and you don’t have enough funds in your regular savings account, that is the time when the emergency fund will be helpful

Watch below vide to understand how fixed deposit interest is calculated with examples.

FD Interest Calculation Video

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5. Consider Additional Strategies

In case you are struggling to accumulate the enough funds for emergency purposes, try other options like starting a side hustle for extra income that can help you to save more
You can also sell the unused items at your place which will help you clean the clutter and save extra money
Rent out the vacant room in your house for an extra source of income
Most important, review your expenses and cut down those recurring expenses and live a frugal life temporarily to achieve this goal of accumulating enough emergency funds

To Build a strong emergency fund is a journey, and not a destination. By prioritizing savings, cutting expenses, staying disciplined and exploring different strategies, you can achieve financial security and peace of mind. Remember, a well-funded emergency fund is your shield against life’s unexpected situations.

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