Why do you need an Emergency fund?

Emergency fund is a vital tool you need in your financial arsenal. But how should you go about building one?

People who have faced financial challenges will tell you the importance of having an emergency fund. Life is uncertain, but clever planning can help you effectively weather financial difficulties. An emergency fund can ensure your daily and monthly expenses are unaffected because of a temporary cash crush. But what is an emergency fund? Let us find out.

What is an emergency fund?

An emergency fund is your own pool of money that you can tap into when you are caught in a financial difficulty. It protects your financial commitments and ensures that your daily needs do not suffer because of a challenging situation.

There are many ways to set up an emergency fund, but the easiest way is to invest in a savings account. Having a savings account ensures liquidity, so you can dip into it whenever you need. A savings account also earns interest, which aids in wealth creation. Many banks, including IDFC FIRST Bank, allow you to open a savings account with ease. However, IDFC FIRST Bank is among the few institutions that offer up to 7% interest on savings accounts.

Why is investing in an emergency fund important?

Life is uncertain and unpredictable. Anything can happen to anyone, so it is better to be prepared for any challenges. An emergency fund can help if you are stuck in financial difficulty, ensuring your daily and monthly expenses do not suffer.

In the event of a loss of income or a medical emergency, you may dip into your emergency fund. You can pay your bills, cover the cost of accommodation and food, and pay your EMIs on time. Without an emergency fund, you may need to use your savings, which disrupts your future planning. So, an emergency fund is also necessary to safeguard your long-term goals.

How to build an emergency fund?

Creating an emergency fund is easy. Begin by setting aside a specific amount in a separate bank account every month. If you do it consistently, the amount will slowly grow into a sizable sum, which you can use whenever you need.

Let us understand this using an example. Assume you have decided to set aside ₹1 lakh in an emergency fund. To achieve the goal, you can save and deposit ₹5,000 or ₹10,000 every month in a savings account. Do it consistently, and you will achieve your ₹1 lakh emergency fund goal in less than two years. However, ensure that you do not use your emergency fund and remain motivated until you’ve reached the goal. After achieving it, you can stop depositing monthly funds into the account.

If you are unsure about the monthly amount you can deposit in an emergency fund, you can use an emergency fund calculator. You can customise the options on the calculator to suit the amount you can afford to deposit in an emergency fund. The calculator will use the information to calculate how long it would take to reach your desired emergency fund goal.

Emergency funds are a no-brainer. They can protect you in challenging financial situations and ensure that you do not depend too much on credit cards and loans. They also offer flexibility, allowing you to start small and design your own emergency fund goal.

Disclaimer

The contents of this article/infographic/picture/video are meant solely for information purposes. The contents are generic in nature and for informational purposes only. It is not a substitute for specific advice in your own circumstances. The information is subject to updation, completion, revision, verification and amendment and the same may change materially. The information is not intended for distribution or use by any person in any jurisdiction where such distribution or use would be contrary to law or regulation or would subject IDFC FIRST Bank or its affiliates to any licensing or registration requirements. IDFC FIRST Bank shall not be responsible for any direct/indirect loss or liability incurred by the reader for taking any financial decisions based on the contents and information mentioned. Please consult your financial advisor before making any financial decision.