Emergency Fund: A plan to tackle life’s uncertainty


Emergencies always arrive unannounced. So, it is necessary to have a safety net to deal with emergencies. While one should always prepare for any unforeseen circumstances, many people avoid having an action plan as long as they can. Many people do not start building emergency funds until an emergency arrives at their doorstep. Let us see what an emergency fund is, its use, importance, and ways to grow it.

What is an emergency fund?

The meaning of an emergency fund, also known as a contingency fund, lies in the word. It is the amount set aside by an individual from the personal budget to cover unforeseen circumstances or unexpected expenses in the future. Saving some part of your income every month can give you a financial safety net in time of crisis.

Why do you need an emergency fund?

Your financial well-being is as important as your physical and mental well-being. And an emergency fund keeps you financially prepared to deal with future unforeseen circumstances. Financial unpreparedness not only damages your financial health in the short term but can also push you into the debt trap in the long term. It is vital to have a contingency plan to deal with sudden expenses. Saving some amount helps you get through a period of job loss, pay cuts, emergency house or auto repair, medical emergencies, and more.

How much should you save for an emergency?

The truth is you can’t decide how much money you will need when an emergency knocks at your door, but you can prepare yourself for it. Ideally, you must save six months of income or saved money for your expenditure of six months.

How can you build your emergency funds?

Yes, we have already heard the “I can’t save,” “I always end up using my savings,” “I don’t need to save, I am good with money,” and many other excuses. Building an emergency fund requires financial discipline, self-control, and determination. So, let us see how you can smartly grow your emergency fund.

Cut down unnecessary spending

Whether you agree with us or not, we all make unnecessary purchases. The only difference is that some of us realize it, and some do not. But how can you decide which expense is necessary and which isn’t? You must know the difference between your NEEDS and your WANTS. Unavoidable expenses are things you need; unnecessary expenses or avoidable expenses are things you want. Example: You need to buy groceries every month, but you want to buy an extra pair of jeans this month.

Review your budget

Budgeting isn’t that tricky but making a budget that suits your situation is vital. Revisit your budget, check the gaps and fill them as per your requirement. You can make different categories and divide your income accordingly. Make a specific emergency fund category and save your money income for that category to deal with any uncertain future expenses.

Plan your expenses and major purchases

Does it sound unrealistic to you? Well, it is not. Planning your expenses and big purchases helps you to stay on track to build an emergency fund. You can delay your purchase if it is necessary for your savings plan. If your budget doesn’t allow you to buy a new television immediately, you can make a different category and save money to buy one later. It is better to delay a major purchase than paying more interest for a long time.

Have an action plan

Yes, we agree that you cannot plan everything, but it is better to have a plan to manage your finances. Plan how much do you want to save in a particular time frame and work on it. How does a plan of action help you to build an emergency fund? An action plan makes you realize that you have a goal to achieve. You will stay motivated and on track to build your emergency fund in a streamlined manner.

An emergency fund is not only necessary because it helps you to tackle unforeseen circumstances, but it can also push you to be one step ahead to manage your finances better. Every person must have an emergency fund and should not rely on easy credit for a future emergency.

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