The crux of ideal financial planning is preparing for emergencies and securing future finances. So, in this article, we’ll go over everything you must know about an emergency fund.
What is an Emergency Fund?
In short, an emergency fund is a savings account set aside specifically for unexpected expenses or financial emergencies. These funds can help cover expenses like medical bills, car repairs, job loss, etc. Having an emergency fund is important because it lets you handle unexpected expenses without going into debt.
Why Having an Emergency Fund is Important?
Here are a few reasons why it’s crucial to have an emergency fund:
1. Prepare for unexpected events
In life, unexpected events are bound to happen. Events like natural disasters, accidents, illness, etc., can happen anytime and can cause significant financial strain. However, an emergency fund helps you prepare for such expenses beforehand so you can get back on your feet more quickly.
2. Avoid going into debt.
An emergency fund allows you to pay for unexpected expenses without borrowing money. Although credit cards, personal loans, and other forms of borrowing can quickly fix unexpected expenses, they can also lead to long-term financial problems. High-interest rates and fees make debt repayment difficult, and missed payments can hurt your credit score. In contrast, an emergency fund can save you from all these hassles.
3. Financial security
Knowing that you have set aside money for unexpected expenses can provide a sense of security and help you sleep better at night. An emergency fund can also help you make better financial decisions because you know that you have a safety net in place.
How to Build an Emergency Fund?
Building an emergency fund is a time-taking process. For instance, if you’ve decided to set aside ₹1 lakh for an emergency fund, you can set aside ₹5,000 or ₹10,000 each month to build up the corpus you need. It’s OK to even cut down on your investments to build this amount.
How Much Money Should My Emergency Fund Have?
Depending on your income and expenditures, an emergency fund can be 3 to 6 months of your monthly income. For example, if you earn ₹30,000 per month and spend ₹15,000 on routine living expenses, your emergency fund should be in the range of ₹60,000 – ₹1,00,000.
You could even divide your emergency fund into two categories.
Long-term emergency funds
This is where you put money aside for large-scale emergencies, such as a major natural disaster or an unexpected medical emergency. A person can invest this fund in instruments that pay a slightly higher interest rate but may take a few days to liquidate.
Short-term emergency funds
In an emergency, this is the fund you rush to. Such a fund can pay little interest but must provide immediate access, which in extreme cases can suffice until you can access your long-term emergency funds.
Where to Invest in an Emergency Fund
Once you’ve accumulated an emergency fund, you shouldn’t leave it entirely in cash or in a bank account. Although an emergency fund should be liquid, it’s not something you can access often. Hence, invest it in a manner so you can earn decent returns from it without compromising on liquidity. Starting your “Emergency Fund” goal with Multipl is the best way to do this.
Why Choose Multipl?
Multipl, the world’s first “Save Now, Pay Later” app, helps you create goal-based investments, which means you can save and invest at the same time for a specific purpose.
By connecting your salary account to the app, you can have Multipl automatically transfer the required amount to your “Emergency Fund ” goal. After that, the Multipl investment engine allocates the right assets and investment portfolio based on your duration, purpose, and risk profile. Thus, you can create your “Emergency Fund” goal with maximum safety and liquidity and will also have the option to withdraw your funds anytime. To learn more, download the app from Play Store/App Store.