What is an emergency fund and What's the point of having one | Motilal Oswal
What is an emergency fund and What's the point of having one | Motilal Oswal

What and Why do you need Emergency Fund

As the past two years have taught us all that, nothing in life is certain and catastrophe can strike at any time. And it is at times like these that the value of money or funds becomes more prominent as it becomes near impossible to find the necessary funds on short notice. 

Preplanning is essential for successfully enduring the waves that we will all eventually face in our lives, as it is for most finance-related issues. Many find it difficult to balance their necessary expenditures, trivial spending and actually saving up for a rainy day. The best way to maintain funds for a rainy day is to make up your very own Emergency fund.

Now some of you may be wondering what an emergency fund actually is, what are its uses, how to save up for an emergency fund and why exactly do you need one? Let us take a look at the answers to these questions. 

An emergency fund is nothing but the money placed aside to deal with some of life's unforeseen catastrophes. For example if you lose your job or need to pay for something unexpected, the funds will help you survive for a few extra months without getting into debt that you may otherwise have had to take instantly. Just consider it as an insurance contract of sorts. But in place of making payments to  an insurance company for insurance, you're paying yourself money that you can use later. If something tragic happens, the money can be accessed immediately and simply and help you smoothly ride over the unexpected bumps in your life. It is commonly said by financial experts that one should have almost six months worth of income saved up as their emergency fund. 

The most reliable strategy to achieve all your goals is obviously to make a plan and then adhere to it. So to make up your emergency fund- Open an account that can't be touched with any of your cards or wallets, such as an eSavings account that can only be accessed online. Automate transfers from your primary bank account to this designated account to coincide with your paydays, so you won't notice the money in your current balance. Once you've saved up enough money in this liquid account, you can move some of it to short-term bonds, mutual funds, or a high-yield savings account, where you can still get it when you need it.

It may be tempting to spend the money for a big overseas vacation, to pay off large debts, to place a deposit for your very own house, to fund an extravagant wedding, or for any other considerable expense that arises. That's why you should always compile a list of your fund's allowed expenses. Ensure that this list is made up of actual emergencies, such as living expenses during unemployment spells, unexpected medical difficulties, home repairs due to a natural calamity, fire, water damage etc, unexpected visits to the veterinarian, unforeseen tax bills, auto repairs or even increase in prices of essential commodities due to policy changes.

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