Finschool By 5paisa

Is there a need for Emergency funds?

Is there a need for Emergency funds?

The Covid-19 pandemic has taught us that an emergency can happen anytime, at any point in  anyone’s life and that is why it is important for everyone to have emergency funds. Through the course of this blog we’ll see what an Emergency fund is and why it is important.

Defining Financial Emergency

Financial crises are unanticipated large costs that demand urgent payment. These costs must be tied to safeguarding your financial future, your health, or your possessions in order to qualify as an emergency.

Here are a few examples of genuine financial emergencies:-

1] Loss of employment

2] Unexpected medical bills to preserve your health

3]Problems with vehicles/accident/breakdown

4]An unforeseen problem with a major system in a privately owned home, such as the air conditioner, roof, or electrical system.

5] A family member passes away, and you must acquire last-minute travel arrangements to attend the burial, etc.

What is an Emegency Fund?

An emergency fund is the money that’s been set aside to cover life’s unforeseen circumstances. This fund money will allow you to survive without going into debt for a few months.Many banks and financial experts recommend putting aside three to six months’ worth of salary in the emergency fund.The money is meant to cover unexpected expenses such as unemployment, unexpected medical issues, house repairs following natural disasters etc.

Features of a Good Emergency Fund

An emergency fund serves as a financial buffer against unexpected events. You may fund it with cash left over from your salaries and tax refunds. Here are a few essential components of an emergency fund:

1)SECURITY

The emergency fund should be built through low-risk investments. It’s better not put your money into high-risk market-linked shares, futures, or options. Investing in short-term fixed-income instruments and bonds with assured yields and low credit and interest risks will do better.

2)LIQUIDITY

It’s critical that these funds be conveniently available and can be utilised in an emergency and it is therefore suggested to invest these in liquid mutual funds.

3) SET NOT IN ASSET CATEGORY

Emergency funds must always be viewed as a financial cushion, not as an Asset. As a result, keep your assets separate from your emergency fund.

How much Should One Save For An Emergency Fund?

When it comes to determining how large an emergency fund should be to safeguard investors from unforeseeable circumstances, several criteria, such as their financial stability and lifestyle, play a role. It’s a good idea to plan for emergency funds depending on your monthly income, family size, level of living, debt, medical history, and etc. Experts recommend setting up at least 3-6 months’ worth of spending as an emergency fund.

Importance of Having an Emergency Fund

Accidents can happen at any time, causing us to incur costs, one of which is monetary. If we put money aside to build a financial backup specifically for such unforeseen circumstances, we may better prepare ourselves to meet our obligations. The following are some of the reasons why having an such a fund is beneficial:-

A} The first and most important advantage of an emergency fund is that it can come in handy in times of financial difficulty.

B} With an emergency fund on hand, you can play a critical role in avoiding a debt trap during a financial crisis.

C)Having an emergency fund helps with managing money better and knowing the differences between needs and wants.

D} Having an emergency fund prepares you mentally to deal with unforeseen situations and reduces stress during financial difficulties.

Be it debt trap, mortgaging existing assets, or redeeming from future securities like retirement funds Having an Emergency fund is crucial in tackling such difficult situations and they also provide a level of security and help reduce unnecessary spendings and manage money better.



Related Articles