Stock market investing can be an exhilarating endeavour. The possibility of high returns can be very enticing, and the market's ups and downs can give you the impression that you're riding a rollercoaster ride. Nevertheless, it's crucial to remember to create an emergency fund in the middle of all the excitement. In this blog, we'll go over the basics of starting an emergency fund and why it's so important for your finances, particularly if you invest in stocks. So if you're ready to take your financial security to the next level, read on!
Fact: According to a study, only 27% of the 5,769 salaried respondents surveyed in India have an emergency fund.
What is an Emergency Fund?
A pool of money put aside specifically for unforeseen costs or emergencies, like a sudden job loss, a medical emergency, or a car repair, is known as an emergency fund. It serves as a safety blanket that protects from unforeseen circumstances. While maintaining an emergency fund may not be as exciting as stock market investing, it is essential to establishing long-term financial security.
Why an emergency fund is crucial
Having an emergency fund gives you peace of mind because it enables you to handle unforeseen expenses without using high-interest loans or credit cards. It can also help you avoid dipping into your long-term savings or retirement corpus, which can have an impact on your financial goals. In a nutshell, establishing financial security and safeguarding yourself from unforeseen setbacks require having an emergency fund.
How to build an emergency fund
One should have enough money in the emergency savings account to pay monthly expenses for three to six months. To do this, you can categorise your expenses into two categories:
- Necessary expenses: This can include rent, groceries, electricity, gas bills, clothing EMIs and Insurance.
- Unnecessary expenses: This can include movies, dinner in restaurants, ordering coffee and costly gifts.
A golden rule of thumb says to set aside and save a minimum three to six months of corpus of necessary expenses. Once you have a saving goal in mind, the next step is to set up a budget to reach this goal. For example, if your necessary monthly expenses add up to ₹40,000— to build a six months corpus, you need to have an emergency fund of ₹2,40,000 (₹40,000*6)
Where to invest emergency funds
Now that you are aware that you must save ₹2,40,000 for an emergency fund, you can create a structure for routine transfers from your savings account to fund this. It would take you 16 months to achieve your goal if you save ₹15,000 per month. However, if you discover additional ways to reduce your spending by ₹5,000 each month, you might be able to achieve your goal in 12 months.
The main objective of the emergency fund is to help you during the urgent need. Therefore, the emergency corpus should always be kept in liquid avenues like high-interest fixed deposits, liquid funds or set it aside as recurring deposits.
Maintain your emergency fund
Remember that emergency funds must be used for emergencies only. To maintain your emergency fund, it's important to track your expenses and adjust your savings accordingly regularly. For example:
- If you receive a bonus or a tax refund, you should review your emergency fund and add to it when possible.
- If your expenses increase, you should adjust your saving goals accordingly to make sure that you have enough funds to cover unexpected outcomes.
- Avoid dipping into your emergency fund for non-emergency expenses. Always consider the emergency fund as your safety net for unexpected expenses.
Conclusion
A crucial first step to achieving financial stability is setting up and maintaining an emergency fund. Make a budget, decide how much you want to save, and identify places to cut back on spending. Everybody will have a different target amount for their emergency fund, but setting it as a top priority and maintaining consistency can help you create a significant financial safety net.