what is an emergency fund? why it is important to have?

what is an emergency fund? why it is important to have?

what is an emergency fund?

no one can predict when can a situation show up where you would need a special fund. (no, not even psychics) an unusual situation can knock on your door any time and that’s why it’s important to have an emergency fund saved up.

so to put it in simple language, an emergency fund is that money that you can use to deal with any unpredictable situation or even chime in your long term goals. are y’all ready to take a deeper dive into the emergency funds? So hop in the boat right away.

why are emergency funds important?

now you may neglect the power of an emergency fund only when you don’t know how important it is. Imagine having a date and being broke or maybe having an important function to attend right after your car broke down. sucks, right? you’d easily be able to tackle these situations if you have an emergency fund saved up.

here are some of the reasons why emergency funds are super important-

  • helps you deal with an unpredictable situation
  • doesn’t make you dependent on anyone else
  • you won’t have to liquidate any asset if you have an emergency fund
  • It maintains the financial sanity

types of an emergency fund

1. short term emergency fund

short term emergencies are the ones that you can tackle in a small sum of money. you don’t need to save a lot of money to take care of a short term emergency. Some of the cases are-

  • repairing your vehicle or home
  • have a spontaneous party for your crush :p
  • unexpected family expenses
  • medical needs or any health-related emergency

2. long term emergency fund

long term emergency fund actually requires you to save a larger sum of money cause the needs over here are bigger than short term investment. some of the long term investments are-

  • job loss or a gap in work-life
  • dealing with a bigger medical condition which will give a big bill
  • shifting from one place to the other

The next question that pops into our mind is, how much money do we actually need to save, right?

The best judge on how much emergency fund to have is only you. emergency fund is different for different people. how? let’s say you’re a bachelor who’s living on your own in a tier 1 city. if you have rented a flat and bought a vehicle, you gotta have more emergency funds than a guy who’s living in a hostel without any vehicles. ideally, you can save up to 5000-1000 rs in your emergency fund. you can either save a larger sum of money in 3 months period or keep saving a smaller sum of money for 6 months.

emergency fund also depends on your status. As in whether you are single or married. While a single person wouldn’t have that much liabilities, a married person might have to save for their partners as well. it is advised to keep anywhere between 15000 to 20000 rs in your emergency fund.

and hey, if you have saved some extra you won’t be disappointed because sometimes the emergency might come in the name of your fav dress on sale. you might be able to afford it without feeling bad about it.

how much do you need to save for an emergency fund?

we all know how much we hate saving good things when you can use them right away, no? saving money for something that ‘might’ happen seems like a bad idea until you actually fall in that situation.

making a fund isn’t a superpower. that’s something you can start practising little bit until you eventually get used to it. you can just start keeping a small amount of money aside for your emergency fund. once you’ve reached the goal you can stop saving for some time.

if you are having trouble in putting the money aside and end up eventually splurging, you can create an autodeposit. Just set a small amount that you wanna save and the money would be stored automatically.

where should you keep the emergency fund?

you should keep the emergency fund at an easily accessible place. we mean, what’s the primary motive to have an emergency fund in the first place? to get the money at the moment you need it, right? We’d suggest you keep the fund as liquid as you can (if not all then at least some part of it) the rest part you can create a digital fund.

The best part is you would also be able to get a small amount of interest on the money you’re saving. keep one month’s saving aside as a liquid fund and from the second month you can directly create a deposit for the same.

You can get anywhere between 2 to 6 per cent interest on your emergency fund if you are storing them digitally.

Summering it up-

now that you are aware of what emergency funds are, get set going on it. you can start simply by jotting down your priorities, see what part of your living would require an emergency and create funding accordingly. your living condition has a lot to do with the fund so saving less might make you land in trouble.

usually, the term emergency fund is confused with rainy day funds while they are honestly 2 very different funds. While emergency funds, as well as rainy day funds, are both used to save unpredictable situations, they are used very differently. if you wanna know what a rainy day fund is, you can simply click here and read more about it.

so fellas, ciao!

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