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Why do you need an Emergency Fund? Here's 5 Simple Steps to Build one.

April 21, 2023

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    Table of Contents

      An emergency fund will blow away the situations that might tend to loosen your financial health. A secure emergency fund is the core of financial stability. Know how and why to build an emergency fund.

      Imagine this: You wake up and discover something is abnormal with your health condition. It can be a normal headache or a severe migraine. Health calamities knock on the door pretty recklessly. And to make things worse you don't have a emergency fund to take care of such unexpected expenses

      In such cases, what you need is a strong backup. Your mental and financial backup can never be compromised. 

      An emergency fund refers to that component of your saving profile that gets accumulated for emergencies and uncertain situations. 

      When uncertain circumstances take the best of you, it is your reliable emergency fund that will help your financial boat to sail. Having this additional financial backup is extremely essential to your overall financial well-being. 

      An emergency fund that can cover up around 6 months of your necessary expenses is a must in your financial portfolio. Deviate some of your savings towards your emergency funds and immune yourself against any financial instability. 

      While it is a smart move to build your emergency fund, how exactly it is to be done might seem like a tough nut to track. 

      With a well set savings plan, it will definitely become easier for you to carve out some funds for emergencies. Let’s take a glance at why you need an emergency fund.

      Why do you need an emergency fund?

      1. Prevent Debt

      An emergency fund will definitely rule out the chances of you going bankrupt, if not anything else. 

      The future can never be accurately predicted, and when it comes to your finances, cards become even tougher to read. 

      Due to this  unpredictable  future, it is better to prevent any chance of a sudden financial blowout. 

      Your current investments might not turn out well, or say you go into debt due to your ill health. All these uncertainties are what an emergency fund protects you from.  

      2. The chances of losing a job

      While it may seem like an extremely rare case to some, it is its rarity that is of concern to us. 

      While you may be working at the best job of all time, an unexpected lay-off might be a nightmare to you. 

      Empirically, we can clearly see that uncertain economic situations in the country often lead to an extensive rise in unemployment rates. 

      The most recent trend can be seen through the lens of uncertainties that the pandemic, COVID-19 has gifted mankind. Millions of workers were laid off all around the world, and those who didn’t have a financial backup suffered the most. 

      Not only this, many times, when companies find it difficult or unnecessary  to hire more, the first step they take in order to save their finances is to lay off workers. 

      Hence, it becomes utterly important for you to have a reliable emergency fund.  

      3. Unexpected accidents

      We may never wish for our savings to dump down in a pit due to unexpected accidents. 

      In difficult times of a car accident or any other calamity, it is important to have a strong financial backup. 

      When these problems arise in a mix, situations become even more difficult to handle\ and your financial health will definitely suffer severely. 

      To the rescue, your emergency fund will always be beside you.  

      4. Some additional sum for future goals 

      Even if you are following a goal based saving strategy, due to inflationary tendencies, the value of your money might go down. 

      The need for excessive accumulation of money might make you give up on your goal. 

      However, one way to tackle this problem is to set aside some funds, in case you fall short of your existing ones. 

      Emergency funds in such cases prove to be a total miracle. 

      Just like how a homemaker woman sets aside money from her monthly budget for unforeseen situations, we must inculcate an emergency fund in our financial portfolio for our unforeseen situations.   

      5. Against any diversions from your normal life

      Human desires are endless. There may be a situation in the future where you would wish to spontaneously renovate your house, buy a new car, or any other such thing. 

      In other instances, there might be a case when you have to take responsibility for your loved ones. In such cases, your emergency will turn out to be your true friend. 

      Now that we know why exactly we will need an emergency fund, the next step is to finally build one. Let’s now ponder how we can personalise our emergency fund.

      How you can build an emergency fund

      1. Divide savings and investments into small contributions

      Whenever you set your savings plan, make sure you bifurcate your savings into small regular contributions. 

      Putting aside large sums all at once will also prove to be hefty on your pocket, and also, you will be progressively less willing to contribute regularly. 

      Whereas, a regular small sum will increase your zest to continue investing. 

      2. Several small savings plan

      While regular small contributions are a crucial component of a successful savings and investment plan, creating several small saving plans will be even more fruitful. 

      Rather than setting a large savings plan, several smaller ones with different targeted goals would be a better win for you. 

      You can even make saving a habit by making the first plan a smaller one, the second one a bigger one and the third one even bigger. 

      3. Automatization of your savings plan

      You must automate your savings. Setting aside money for savings directly by yourself will make you psychologically less willing to continue the process. 

      Whereas, if you automate your savings plan and let your bank handle your account and automatically transfer funds from your salary into your savings account, your savings will grow faster without you even noticing! 

      There are plenty of online apps and tools available for planning out a nice savings plan. 

      Apps like Jar have options to directly save your change and invest in digital gold. 

      With smart tools too, you can plan out an extensive savings plan.

      4. Track your monthly spending and avoid credit cards

      When you start your savings journey, you must start to keep track of your monthly spending. 

      Just like you will manage your savings, you must also take into consideration your spending. 

      Excessive savings with excessive spending won’t reap you any sweet fruits. The key to a smart saving plan is to spend and save evenly.

      5. Avoid over or under saving

      Another component that might lead to a failure of your savings plan is either over saving or undercutting your savings

      With over saving, you will be practically marginalizing your wishes and with less savings, your goals will tend to remain unaccomplished. 

      Therefore, a balance between the two is what you will need to even out your financial health. 

      This is how you can make your own emergency fund and avoid getting into a vicious cycle of debt. Invest smarter, save better!