How to build an emergency fund in 3 steps
An emergency fund is the need of the hour. Emergencies come unannounced. The economic distress is spread wide and affected people from all walks of life. Job losses and reduced income have caused severe stress to families. Most people have learnt it the hard way and now understand the importance of having an emergency fund.
It is never to late to create an emergency fund. An emergency could come in the form of loss of income or health related problems. You are best placed to build a corpus when things are going good.
First Step – Identifying Essential & Non Essential Spends
The first step while building an emergency fund is to figure out their mandatory expenses. These are expenses that you cannot do without no matter what. They typically include groceries, utility bills, rent, EMIs and child care expenses. Segregate essential and non-essential expenses. Discretionary spends related to lifestyle like shopping, eating out and travel can wait.
Second Step – Starting Small & Using Supercharging Savings
Ideally, one should look to accumulate an emergency fund that can last 6 – 12 months of their mandatory/essential expenses. Starting small and having incremental targets help motivate you to save more and gradually build your corpus. Eliminating unnecessary spends will allow you to save more and accumulate the required funds at a faster pace. Using bonuses and cutting down on certain lifestyle expenses provide a booster to accumulate the required funds.
Third Step – Choosing the Right Instrument
The main criteria for choosing instruments for emergency corpus must be how quickly it available in an emergency situation. Investors should not consider other criteria like higher returns or tax benefits.