Emergency funds are created to meet critical and not avoidable situation, when we need money urgently like medical emergency, job loss time, business loss and other any such family issues. Importance of emergency funds emerges in any such eventuality, if we have already created an emergency fund, then we can handle it well, if we don’t have emergency fund it may it may compel us to borrow, use credit card, loans and break investment like fixed deposits, recurring deposit and others. Emergency fund give financial stability. Thumb rule of emergency fund amount should be 6 to 9 months expenses. Emergency fund is an important part of your overall personal finance, it provide a strong back up for finance in case of crisis or emergency. It may help you to take care of financial need in case of emergency without disturbing investment; those are set for long term goal. Usually such funds can be kept in bank’s fixed deposit or liquid or ultra very short term funds, but always prioritizes the safety of emergency funds over returns. While creating emergency fund it is best to schedule payments from your primary account. So as to divert your portion of income towards your emergency fund. If you are investing in recurring deposits you need not have to remember to redirect your funds toward emergency fund each time. An insurance policy may help at the time of need; hence assess your insurance need with sufficient coverage. It is important to have well defined criteria for using emergency fund so as not to amortize your savings you have accumulated over the years. Creating emergency fund need more financial discipline.

Emergency never comes knocking the door. You may be enjoying the moment and in the next moment you may find yourself dealing with medical emergency.

How much you should save? Use 3-6-9-12 rules for emergency fund.

The 3-6-9-12 rules for emergency can be helpful but these are guidelines only and not hard rules, you can opt for 4-7-10-13 based on your income, expenses and past experience.

3 Months take home pay is good emergency fund target; if you are single have steady salaried job and no dependent like children or major dependent.

6 month take home pay is good emergency fund target; if you are married and have dependent like children

9 month take home pay is good emergency fund target; if you have family with dependent parents

12 month take home pay is for entrepreneurs or those with variable income.

Set your target based on 3-6-9-12 rules based on income stability and dependents.

Calculate baseline survival budget

Step – 1 – Calculate the Fixed disposable income (groceries, rents, school fees, EMI’s, utilities and insurance premium payable and any monthly expenses that best suit for you apart from the aforementioned)

Step – 2 – Multiply that monthly amount depending on tier you fall. 3-6-9-12

Why do you need emergency fund?

A Financial Cushion during Crises – An emergency fund offer instant source of money without delay, it prevent from obtaining loan or other alternative which may worsen financial conditions in future.

Avoid disruption to long term goal – An emergency fund prevent the need to withdraw from long term saving or long term goal at loss.

Income replacement during crises – An emergency fund replaces income replacements if you experience a layoff or medical emergency.

Peace of Mind – An emergency fund provide you the security to handle emergencies confidently and reduce stress.

How to create Emergency Fund

Let’s check some practice to maintain and grow emergency funds.

Automatic Transfer – The easiest way to grow emergency fund is to automate your savings. This allows you to free up money to contribute to your emergency fund. Set aside a certain amount of money from each paycheck, choose an amount that you can comfortably spare and put straight into separate saving accounts. Without effort to this is to set up an automatic transfer from checking account to so created saving accounts.

Keep the Change – Slow and steady wins the race, when you get spare change after making a cash purchase or even after big bill. Drop it into a jar or any such container, when the jars or containers filled up take it to the bank and deposit into your savings accounts.

Put away windfalls – We all come across sometimes or other unexpected money come across during any special occasion or festival, try to put a sizeable portion or even all of the money in your emergency fund.

Add in the extra – When extra money or surplus remain in your account at the end of the pay period put some or all of your surplus into your emergency fund.

Trim the fats – Most of us can cutback our budgets by targeting – food and dining out, unused subscription and entertainment, transportation and personal care and etc. Even cutting a small expense can add up and when we put the resulting funds into our emergency fund it can built a bigger corpus.

Let your money work for you – When you put your emergency funds into a high yield saving account or money  market account, it will began to grow on its own.

Conclusion

Creating emergency fund can be challenging, the size of emergency fund vary based on lifestyle, monthly expenses and family responsibility. There are number of tricks to accumulate for emergency fund, the best approach depends upon your personal preferences and self monetary discipline.  What so ever be the monetary situation but we can at least take a step toward building and creating emergency fund.