Why and how to plan for an emergency fund?

Why and how to plan for an emergency fund?

by 5paisa Research Team Last Updated: May 04, 2023 - 03:08 pm 15.4k Views
Listen icon

An emergency is anything that happens without any warning or cautionary symptoms. As a result, it is critical to plan ahead of time for crises. Continue reading to learn more. 

After streamlining cashflows, the next stage in financial planning is to plan for contingencies. Making emergency plans usually aids in overcoming the financial hardship experienced by a loss of income. 

There is a legitimate purpose to creating an emergency fund in the first place. This is because when you lose your job, you must spend on several necessary costs, including your EMIs. 

By setting up an emergency fund, you can protect the savings you have made for goals like your children's education and retirement. 

 

Emergency Fund Explained | How to save money for Emergency Fund | Types of Emergency Fund

 

Building an emergency fund 

It is not enough to understand that you require an emergency fund. It is also critical to understand how much you require and how to create it. Let's start with determining how much you require.  

The emergency fund should comprise any fixed costs that you must bear on your own. Rent, food, school fees, and other essential expenses must be factored into the emergency fund calculation. 

In addition, you must add the insurance payments and EMIs that you pay. You must now determine how many months of spending you must set aside as an emergency fund. 

This is generally determined by your occupation. Why take into account occupation? Since each occupation has varying amounts of job security. For example, if you work for the government, your job security is high, and you may only need to save three months' worth of expenses in an emergency fund. 

However, if you work in sales and are at risk of losing your job, you should save up to a year's worth of expenditures in an emergency fund. Once you've determined the number of months of costs to set aside, add the fixed expenses and EMIs and multiply by the number of months. 

After that, add the insurance premiums to the total. The rationale for adding the insurance payments later is that they are normally paid annually. Now that you have determined the amount needed for an emergency fund, it's time to start building it. 

Assume you need to save six months' worth of spending in an emergency fund. It is smart to have one month's costs in a savings account, 15 days' expenses in cash at home, and the remainder in liquid funds and ultra-short duration funds. 

You may be thinking about why you should maintain 15 days' worth of spending in cash. The rationale for this is if you are unable to access the ATM in an emergency, you should have enough cash to cover your daily needs until the ATM becomes operational.  

This problem may emerge as a result of flood-like situations in which ATMs are unavailable for many people to withdraw cash. Having cash available during these times allows you to meet your everyday necessities. 

 

How do you rate this blog?

Start Investing in 5 mins*

Rs. 20 Flat Per Order | 0% Brokerage

oda_gif_reasons_colorful

About the Author

Our research team is composed of some highly qualified research professionals, their expertise range across sectors.

Disclaimer

Investment/Trading in securities Market is subject to market risk, past performance is not a guarantee of future performance. The risk of loss in trading and investment in Securities markets including Equites and Derivatives can be substantial. Also, The
Enjoy 0%* Brokerage with 5paisa
Resend OTP
Please Enter OTP
Mobile No. belongs to

By proceeding, you agree to the T&C.

Latest Blogs
Swing Trading Stocks: Week of 01 April 2024

Swing Trading Stocks for the Week

Weekly Market Outlook for 1st April to 5th April

The week gone by was a truncated week of three trading sessions, but it was not short of any action as the index witnessed a smart recovery in three days. Nifty almost tested the previous all-time high above 22500 on the expiry day and ended just above 22300 with weekly gains of a percent.

Stock in Action – Bajaj Finance

Bajaj Finance Movement of Day