5 MinsDec 22, 2021
You are a young professional who has recently started your first job. You have shifted to a new city and are paying for house rent, food, travel, etc, from your pocket. In addition to these essential expenses, you are also repaying an education
loan. So, is this a good time to start saving money for an Emergency Fund? Yes, it is. Let us see how to do it even if you have limited money to spare.
An Emergency Fund is the first step towards building wealth in the long term. You don’t need a very high income or accumulate a sizeable corpus to start an Emergency Fund. You can start it by setting aside small amounts of money every month.
You could aim to save a significant corpus by the time your educational loan is paid off.
Here’s how to start building an Emergency Fund
To build an emergency fund, you must take into account various regular monthly household expenses, including EMIs, and other unavoidable expenses (the responsibilities
you shoulder) that are necessary to meet no matter what the situation is. Very broadly, your emergency fund should ideally be:
|Emergency Fund = 3 to 6 months of regular monthly unavoidable expenses, including EMIs|
So, if your monthly, regular, unavoidable expenses are Rs 40,000, going by the above formula, your Emergency Fund should be: Rs 40,000 x 6 months = Rs 2.4 lakh.
Furthermore, if you or your family members have a medical history, you may add 5%-10% extra for medical emergencies (taking cognizance of the health insurance cover).
Holding an adequate amount as Emergency Fund would offer you the required cushion in case you lose your job (for whatever reason) and/or face a medical emergency.
[Also Read: Why You Should Build an Emergency Fund]
Till you save the required amount as an Emergency Fund, make an effort to cut down on discretionary expenses such as eating out, movies, splurging on expensive gadgets, premium watches, etc.
Where to park your Emergency Fund?
When you choose avenues to park your Emergency Fund, the objective should not be to clock high returns, but more importantly, liquidity and safety of the principal while yielding nominal
Here are a few avenues to consider…
1. Savings Bank Account – From your monthly earnings, a suitable portion can be transferred to a separate savings account earning interest at the rate of 3.0%-3.50% per
annum, as opposed to it lying idle and perhaps unsafe at home. Doing this will ensure easy access to your money during an emergency.
2. Bank Recurring Deposit – You can clock a slightly higher rate of return by allocating money regularly from monthly earnings into banking recurring deposits.
This special type of term deposit that facilitates systematic deposits every month is a meaningful choice.
3. Debt & Mutual Funds – The objective of Debt & Money Market Mutual Funds is to provide steady and regular income to investors. But this may vary depending
on the fund sub-category. Among the debt mutual fund schemes, you may consider Liquid Funds, Money Market Funds, Ultra-short Duration Funds, Short-Duration funds, and/or Low Duration Funds by carefully assessing their portfolio characteristics
and performance track record. But remember that debt funds are not risk-free. As is the case with all mutual fund investments, some element of risk is always involved.
Always opt for a judicious mix of these avenues to build your Emergency Fund. Moreover, make it a point to timely review the Emergency Fund at regular intervals. This is because there may be situations in life such as, marriage, the birth of a
child, a divorce, etc, that may have a bearing on the Emergency Fund you need to hold. Ideally, you want to make sure there isn’t an under-allocation towards your Emergency Fund. And if that’s the case, take all the necessary remedial
measures in the interest of your and your family’s financial wellbeing.
Benefits of an Emergency Fund:
- Ensures easy access to your money when you need it the most
- Helps keep debt under control as you can avoid taking a loan for an emergency
- Reduces financial and mental stress
- Safeguards the financial well-being of your loved ones
Start building your Emergency Fund today. You can also use the Emergency Fund calculator to calculate how much you need for your fund.
Disclaimer: This article has been authored by PersonalFN, a Mumbai based Financial Planning and Mutual Fund research firm. Axis Bank doesn't influence any views of the author in any way. Axis Bank & PersonalFN 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.