Previously i had written a blog on the Beginner’s Guide to Investing 2025 where i had mentioned that Emergency Fund is of utmost importance in your journey of wealth creation. I had also mentioned that Emergency Fund should be created and there are various ways of creating a pool of money which serves as an emergency Fund for you. But just for clarity sake, ,let us once again understand what is an emergency fund.
What is an emergency fund?
Emergency fund is a fund or a corpus sum amount that you have parked for an unexpected situation when you have no steady cashflow but your expenses remains the same. Hence in order to provide for your expenses, this emergency fund can be used. Remember that emergency fund is for emergency only. It should only be used if there is no other alternative. Your emergencies can be something like job loss, health issues which can lead to job loss, sudden death in the family, etc. In such situation if the steady inflow of money gets disturbed this emergency fund comes into action.
How big should be an emergency fund?
The emergency fund should be at least 6 months of your fixed expenses. Your fixed expenses would include all your monthly bills and EMIs, your children’s school and tuition fees, groceries and food, premiums if any, etc. You can also make the emergency fund as 6 months of your take home salary. You can also increase the emergency fund to 1 year of your fixed expenses. Its up to you.
How can i create an emergency fund
There are various ways you can make an emergency fund. I’ll give you three ways to creating them. After reading these three different ways of creating an emergency fund, you will automatically start thinking out of the box and come up with a strategy of building an emergency fund that suits you.
- If my monthly take home salary is 40k and my fixed expenses is 25k a month, then as per simple mathematics, my emergency fund should be 1.5 lacs. Every year,i get a bonus. This year when i get a bonus, that bonus will be used to create this emergency fund.
- If my monthly expense is 25k, then i save approximately 10k-15k a month. Do an SIP in the liquid mutual fund scheme or bank recurring deposit of 10k for 15 months. You will have your emergency fund ready.
- In case of an emergency i can take a loan from my father. I hope he wont charge any interest. So i get my emergency amount without having a need to save it monthly and park it. Also, i can use my credit card which nowadays gives 1 lac credit limit very easily. As soon as my emergency is over, i can pay by credit card bill.
These are some ways of looking at emergency fund creation. You necessarily do not need to have a saved up corpus for your emergency fund, however doing that gives you a sense of security and relief.
