For salaried individuals, financial stability starts with a well-planned emergency fund. Life is unpredictable—medical emergencies, job loss, or sudden major expenses can arise when least expected. Without sufficient savings, you might have to rely on high-interest loans, adding financial stress. A dedicated emergency fund acts as a safety net, ensuring you stay financially secure without disrupting your long-term goals.
An emergency fund is like your financial backup plan, there to help you out in unexpected situations. It’s not for everyday spending or investments but for those surprise expenses—like a medical emergency, sudden job loss, or urgent repairs. The idea is simple: by having this fund, you won’t have to stress about taking loans or getting into debt when life throws a curveball. It’s all about staying financially calm during tough times!
Why is emergency fund needed?
- Job Loss: In today’s time, job security is decreasing, and if you have an emergency fund then you can search for a job without any tension.
- Medical Emergency: Health issues can happen anytime, and insurance does not cover all medical expenses.
- Unexpected Expenses: Car repair, home repair, or any other emergency expense can occur.
- Financial Independence: You will not need to borrow or take a loan from anyone.
How much emergency fund is required?
According to financial experts, salaried people should have a fund of at least 3 to 6 months of expenses. If you have a family (dependent parents, wife, children) or your job is risky, it is better to keep a fund of 6-12 months.
Calculation Example:
If your monthly expense is ₹30,000:
Minimum Savings required = ₹90,000 (3 months)
Ideal Savings required = ₹1,80,000 (6 months)
High-Risk Situation = ₹3,60,000 (12 months)
Where's the best place to keep your emergency fund?
Your emergency fund should be within easy reach when you need it the most, but not so accessible that you end up using it for non-emergencies. A great strategy is to divide it across different savings options, ensuring you can access it quickly while also earning a little extra on your money.
Here are some of the best options for parking your emergency fund:
- Savings Account (30%) – Ideal for quick access, though the interest is relatively low. It allows instant withdrawals whenever needed.
- Fixed Deposit (30%) – Offers better interest rates, but there’s a penalty if you withdraw prematurely. Consider using a Sweep-In FD, which links to your savings account and allows for smoother access to funds.
- Liquid Mutual Funds (40%) – Provides better returns than FDs and offers the flexibility of withdrawing anytime without much hassle.
Why is it necessary to keep the mix?
- Liquidity + Returns – Savings account gives instant access, FD gives better interest, and Liquid Mutual Funds give slightly better interest than FD.
- Risk Diversification: If you keep all the money in just one place, you will either get low interest or have a liquidity issue.
- Better Financial Planning – This mixed strategy will help you maintain balance.
How to create an emergency fund? (5-Step Guide)
Step 1: Start with Budgeting. Your first step would be to analyze your budget and see how much you can save per month. You can use the 50/30/20 budgeting rule in which 20% goes into savings.
Step 2: First Start
If you cannot save a large amount in a week, then set small goals:
- First, keep a target of ₹10,000
- After that, you will earn up to ₹50,000.
- Slowly complete the fund for 3-6 months.
Step 3: Enable Automatic Savings
Start a SIP or RD (Recurring Deposit) every month which will go directly into the emergency fund. This will help you maintain discipline.
Step 4: Save Windfall Gains
If you get any bonus, tax refund, or gift money, put some part of it in the emergency fund. This fund will be released soon.
Step 5: Cut Expenses
If you want to build an emergency fund quickly, then temporarily pause unnecessary expenses like dining out, OTT subscriptions, or luxury shopping.
Common Mistakes to Avoid:
❌ Don’t Invest Your Emergency Fund – Avoid putting your emergency savings into stocks or high-risk investments, as market fluctuations could put your money at risk when you need it the most.
❌ Don’t Keep Everything in a Savings Account – While savings accounts offer quick access, the returns are low and won’t keep up with inflation. Consider using Fixed Deposits or Liquid Funds for better returns.
❌ Don’t Use Your Emergency Fund for Non-Emergencies – Your emergency fund is strictly for unexpected situations—don’t dip into it for everyday expenses or extra spending.
Conclusion:
If you want financial security, building an emergency fund is the first step. It will keep you stress-free during uncertain times. Start today—small contributions can lead to big results over time!