The most common advice that you must have received is “live in the moment or live in the present”. But that does not include the fact that we all should not think and plan about our future too. Planning about our future includes money management and maintaining an emergency fund. Building an emergency fund is a critical part of life. In this article, we will deal with the meaning of emergency funds, the importance of building them, how to build them, and the types of emergency funds.
An emergency fund is a part of sound financial planning. The term “emergency fund” explains a lot of things. However, to make it simple, an emergency fund consists of money that people stash away every month or year from their incomes. This stashed-away fund is used by people in case of an emergency like a family crisis, a big purchase, finance studies, etc. Emergencies can also include any future plan or starting a business, to manage to live in between jobs or treatment for your illness.
An emergency fund is like a safety net that everyone with a rational financial plan makes room for. This fund should be easily accessible. Hence highly liquidated emergency funds should be around for expenses of 5 to 6 months. However, the past year has made the experts increase the said time limit. Due to the whole world under lockdown and quarantine, many people have been financially paralyzed. Not getting the desired work and income, losing their job, or any other emergency. These types of situations are very common in times like these. Emergency fund acts as a savior in times like these.
Some people say the emergency fund is just another name of savings. Savings are the money set aside for things that might be carried on in the future. But an emergency fund is made up for the things that are not planned in the present for the future. In simple words, savings are done for the things that are going to happen in the future and are planned. However, it is a fund for unpredictable or unplanned future events. Now when the difference between the two is clear, I am going to tell you some examples of emergency funds.
Car and home maintenance expenses are the most common type of emergency funds. According to the statistics, every second a serious accident occurs on the roads of India. This means every second there is a risk of getting seriously injured and an additional car expense that wasn’t expected. Hence maintaining a car expense emergency fund is a must.
Last year and this year, there have been numerous hurricanes and unexpected heavy rainfalls. If you live in such an emergency-prone area, then set up some funds for home repairs should not even be a question. Our car insurance and home insurance cover the majority of the costs but some extra funds set aside for other unplanned situations never hurts.
This heading speaks for itself. These difficult times have made us realize the importance of having sound insurance and an emergency fund. Coronavirus has made us save the majority of our funds and save it for any medical emergencies. We live in such times that there is a high probability for us to get sick. And even if it has a mild effect on us, we need to be financially guarded before it hits us. Hence, setting aside some funds for medical emergencies is another example of an emergency fund that is very important.
People this year and the last year faced yet another problem, which was “Unemployment”. Companies from all over the world are laying off workers. And people are struggling with paying off their bills in the absence of their jobs. Hence with the example setting up throughout the world, it is crucial for people to build up an unemployment emergency fund. Even if the coronavirus does not affect you, it is still important for rational planning. For some XYZ reasons you need to leave your job for some time, then you should always have some amount of fund set aside to pay for yourself. Think about how much time it took for you to reach where you are. And how many opportunities are available for that position in your respective field. Calculating these things will give a clear picture of how much you should set aside for this emergency fund.
When a family member is sick or has passed away then it becomes difficult to travel when you are worried about the cost of travel. The last thing you need to worry about in such situations is how many meetings your family can cost you. Thus making a plan for any future obligations is important. Having a fund for emergencies will allow you to travel unexpectedly in such situations. It will enable you to not put every expense on your credit card. A plan is efficient when there is room for unexpected expenses.
Life gives you unexpected turns. Times, when you think you are going a certain way, can surprise you. Family emergencies can be of various types. Either dealing with loss, taking care of a pet or a child, an urgent matter that requires your immediate attention, or loss due to criminal activity. Family emergencies is also a very important reason why one should never leave emergency fund to last. Maintaining a fund for such emergencies is something that everyone should consider.
In this section, I am going to tell you all the small steps that one can take to build an emergency fund. You do not need to have a lot of money for it. Just some proper planning, organizing, and a little bit of effort. These are the only things that are required. Now I will tell you how!
A monthly budget is a financial statement that shows the monthly expenses and earnings of an individual. Every company, government, or household makes a budget for a sensible plan. How a household has to run, how much money to set aside for necessary expenses, and how much one should set aside for emergency purposes. All these decisions are made after having a clear picture of expenses and earnings. Hence first and foremost step is making a budget.
Making a list of all the expenses as soon as you spend the money can give you a more clear picture. For example, you spend Rs 2000 on shopping for the mats today in the market. So, instead of keeping to record this by the end of the month, you should record it as soon as you go home. Because such small amounts can pile up later.
Earning some extra money can be a way to go for building such a fund. How? Having a passive income can be helpful as you can manage the other expenses from your main income. And can set aside your passive income for the emergency fund every month or week. For example, online teaching, freelancing your services, or online business.
Chegg is one such platform that provides you the opportunity of connecting with thousands of students. Chegg hires subject matter experts who answer questions that are asked by students from all over the world. They hire people for their Q&A department. You can earn a considerable amount with this job. Chegg aspires to improve the overall investment by helping students learn more inefficiently and effectively. As a subject matter expert, you can also earn according to the questions that you answer correctly. The subject ranges from commerce to science to arts. Whatever subject you think you master, you can choose. The registration process is very simple as well.
These are the steps that you should follow if you want to sign up as a subject matter expert to earn something extra.
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This last option might be confusing to you. But let me explain it to you, all these things require effort as well as proper planning. But keeping yourself in check requires something stronger than effort which is willpower. Making a budget, plan, an emergency fund, and earning extra income will only work when you decide to not spend this fund on something else. Things might look and sound urgent at the time but is actually not. Thus, an emergency fund should only be used at the time of emergency.
We have learned what is an emergency fund, the types of emergency funds and how to build one. Now, why go through all this trouble when you don’t even know why to build one? Thus in this section, I am going to tell you about the importance, significance, and benefits of building an emergency fund.
As soon as you start budgeting for your future and making plans for your future, you automatically start budgeting. Budgeting itself has numerous benefits. However, with budgeting, you will start paying attention to all the recurring expenses. These expenses include all those expenses that can be avoided. Hence building a fund not only gives you a safety net. But also organizes your spending and saving habits.
Knowing that you have something to rely on is an underrated feeling. A presence of a safety net can give your mind a sense of peace. When everything goes wrong and life gives you shocks instead of surprises, you have one less reason to worry. Therefore building an emergency fund is like having an umbrella when it rains.
Imagine a scenario where someone leaves their job to go after something that they really wanted to do. It not only requires a lot of courage but also money. It need not be possible that one might start earning from the start. That is how the emergency fund helps in achieving goals. It takes care of the financials and bills. Especially until we can manage our expenses with our incomes or salaries.
Medical emergencies are one of the greatest reasons why one should always save up for an emergency fund. The presence of an emergency fund can save you from a lot of stress when already going through some medical illness. A serious medical illness can add up bills. It might also cause less or no pay because of all the sick leaves. Hence an emergency fund in such a case can do the trick. It will relieve you from the pressure of missing bills while worrying about the monthly expense.
We all have been taught to wear pads while riding scooters, bikes, and skates. No matter how good you get at riding your bicycle, you must always be safe. Just like that, it is advisable to sew yourself a safety net before you need one. Because you might not know when you need one. In this article, I explained why it is important to have an emergency fund. It also gave a clear picture of how to build it. Financial security brings peace of mind, a safe house, and a happier life with it. Hence financial security includes building an emergency fund.
With all the luck, I hope you would not need to use your emergency fund in any dire situation. I hope the only surprise you get is a box full of chocolates. However, it is always smart to protect yourself in advance. It is always better to have something that you do not need than to need it and not have it.