Emergency fund and how to build one-

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While doing your financial planning you may have surely heard about Emergency Funds. So what is an Emergency Fund? An emergency fund is a part of income stashed away for later use, in some emergency or distress. The purpose of an emergency fund is to improve overall financial security and help in times of unanticipated dangers. Also, an emergency fund is created to protect from possible unemployment over a period of time.

Usually, the emergency fund is kept in a savings account or in some liquid asset that could be easily converted to cash.

As the emergency fund is quite very important, deciding how big it should be also is a question? The purpose of an emergency fund is to serve in case of job loss, or huge expenses such as a sudden medical emergency. The fund should be at least 3-6 times your monthly expenses, this could be bigger in case you want It to be.
How to build an Emergency Fund?
Building an emergency fund has a process that you have to follow to build it correctly.
1. Set a target date for a start and an end to building your fund?
Having a fixed timeline makes it easier to achieve your goals, you can understand how much money you would like to save per month to successfully complete building your fund. For example, you have a salary of 1 lakh per month and need 50 thousand per month. Then building an emergency fund worth 6 months would result in gathering 3 lakh, but for building a fund worth 3 lakh would need to save 30000 for 10 months to successfully build your fund. And it would take you around 10 months to build it.

2. Taking stock of existing assets
Before you start building your friends, you would need to take a total of assets that you already own, this may be money that is already lying in your bank account as an emergency fund or fixed deposit that is not for any specific purpose right now, you can take some of such funds and start building your fund.

3. Draw up a monthly commitment towards your fund
Once you’re done with calculating pre-existing assets. Make a calculation of how short you are and decide how much more it is required to achieve your desired amount for the emergency fund. For example you decided to make a fund worth 3 lakh, and after totalling up your assets you understood that you’re 2 lakh short of your desired amount. Then you need to calculate how much you would need to set aside in order to complete your fund in the desired time. So if you’ve set a target of 10 months then you need to save 20000 per month, and in case you have set a target for 6 months then it would be 33,333. But make sure you stand up to your monthly commitment, so as to complete your fund within the given deadline. Also, this could depend on your monthly income or how much you could contribute.

4. Create a separate account for the accumulation of funds
Make sure that you spend money from your emergency fund for non-important uses. This money could be deposited in a separate account or some investment scheme. But one thing to remember is that anywhere you invest that money, make sure it has liquidity and can be converted to cash easily without losing its value. But rather than making it sit in your bank account, it is better to invest it somewhere so that it would at least appreciate.

These are the 4 steps to make an emergency fund that would be ideal for you, so make sure you understand and follow these steps, before jumping into the process to create an emergency fund.

Conclusion – An emergency fund is surely important in financial planning, so understanding its importance is necessary. Also at any point in life, it’s better to be financially secure, and have a backup ready. And that was about an emergency fund.

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