How much should I save each month for an emergency fund?

Since last year, many of us lost jobs, monthly income and business, whether online or offline, due to uncertain breaking out the Coronavirus in and around the world. It's an unpredictable and unexpected moment of life that people came down to the road, became homeless, lost lives, and everything whatever they had. And we are passing through this tough time of life.

We never think of such a pandemic that swipe away everything from our hands. It brings a strong sense of emergency funds to many of us. If they had an emergency fund, the people didn't suffer as we have seen them in the media.

Every person must have an emergency/contingency fund so that he can balance his lifestyle. Let's learn about emergency or contingency funds.

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Table of Contents

1. Overview
2. Why do I need an emergency fund?
    i. In case, lose income (jobs, business, etc.)
    ii. Medical emergencies
    iii. Child's schooling
    iv. Emergency pet care
    v. Car repair
    vi. Bigger-than-expected tax bill
    vii. Unanticipated travel
    viii. If unexpected things happened in life
3. What is an emergency?
4. What is not an emergency?

5. What are the types of emergency funds?
    i. Short-term emergency fund
    ii. Long-term emergency fund
6. What are the benefits of emergency funds?
    i. Earn interest:
    ii. Avoid costly debts:
    iii. Peace of Mind:
    iv. Keeps you from spending on a whim:
    v. Ensure security of your future:
7. How do I know about my required emergency fund?
8. How much should I save money each month for the emergency fund?
9. Where should I put the money?
10. When should I use this money?
11. Conclusion

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1. Overview

A personal financial backup to tackle emergencies of one's life may be suitable to say as an emergency fund. Our life is unpredictable and unforeseen. Who knows about tomorrow what would be happened. If you have a financial backup, you can balance your life even at the time of bankruptcy, which you may be finding difficult to manage your lifestyle as of job loss or business loss.

To my mind, an emergency fund is a big supporter of life to step further without any fear and stress. It serves as a safety net when emergencies occur. We cannot avoid the unexpected circumstances of life, likely to be faced by everyone at least once in their lifetime. And you cannot face any emergencies beforehand when you have money at your hands. It is unforeseen and unpredictable totally.

Let's build our emergency fund and live our life the way we want it.

2. Why do I need an emergency fund?

To be in a position to cover up the unanticipated expenses or losses in your life. The unexpected situation maybe anything that varies from person to person. It is likely to be faced by everyone at least once in life, even if they didn't suffer it earlier. Based on my understanding, I've listed below eight emergencies usually, we do face it.

    i. In case, lose income (jobs, business, etc.)

Usually, we hear job loss, business loss, no monthly income, etc., from the mouth of our relatives, friends and people around us. It is the main reason to have an emergency fund for everyone. We need groceries and other needy things for survival, which we must have a stash of cash to pay for it even if we are no longer receiving a regular monthly salary or payment.

It is a good habit to save an emergency fund to backup whenever there is a dire need.

    ii. Medical emergencies

Medical emergencies are one of the unanticipated situations of life that required a stash of cash to pay for it whether you have money or not. It happens in our daily life without any information. It could be major or minor surgeries, accidents, and other health issues. For example, when I was 11 years old, I had major surgery on my abdomen. My parents didn't have a single penny to afford it — nor we had an emergency fund. Fortunately, one of my uncles helped us to make the surgery successful. But all of us may not have such uncle-aunts or relatives. 

The second time, I was doing graduate and got to remove my two impacted wisdom teeth. I didn't have an emergency fund — nor my parents had a single penny. The whole night, I struggled with severe tooth pain until morning by chanting a God's Name. I put a few pieces of garlic on two infected teeth on advice to one of my friends, but it didn't work. In tomorrow morning, I bought a few painkillers antibiotic tablets and got relief. Nevertheless, I couldn't afford to visit any doctors. And the pain continues until I'm in a job.

Many health issues bring down our lives in a flash of light if we don't have a stable income or financial backup. I don't mean that money can save your life all the time, but it does if it is possible.

    iii. Child's schooling

In education, we need to invest a lot of amounts to shape the future of our children. You need to pay school fees every month, or you may need additional educational services to keep up your child at school. What happens if you don't pay the fee on time as of delayed salary or job loss? Your child won't be allowed to sit for an exam. If it has already appeared, then his result withheld by the school.

Apart from the school fees, sometimes, you need to buy additional copies, books, dresses, shoes, etc., which require instant money. If you can't get these things on time, your child will face punishment set by the school. So, it is better to have an emergency fund to back up such a situation of your child even if you don't have a regular paycheck.

    iv. Emergency pet care

Usually, we keep a pet animal at home, that may be a cat or dog.  Yeah, somehow, we can accommodate the regular expenses for owing them. But what would be if your pet animal got an accident, injured or need instant surgery? And if you don't have a regular income. However, if you want to shell out thousands of rupees to save the life of your pet animal, you must have an emergency fund.

    v. Car repair

Keeping a car is likely to be an unexpected expense to you. When you drive away from home to duty and vice-versa, any accident maybe occurs suddenly. If you're not ready beforehand to face such a situation, you may lose what you have earned. Don't think that you will use your credit card or car insurance to fix the car broke. Sometimes, it may be more than the credit available on your credit or car insurance.

    vi. Bigger-than-expected tax bill

It happens to you very rarely. If you are on a family trip somewhere and got an unexpected bill in travelling or hotel, what would you do without an emergency fund? Sometimes, you may get unexpected electricity bills or any taxes. Recently, we're getting free electricity at home, but I got a bill costing out of my salary. It was the arrear of a few years ago. That's why we need to be ready beforehand.

    vii. Unanticipated travel

Sometimes, a death in a relative or your family may force you to purchase a last-minute travelling ticket if you are residing away from them. What happens if one of your relatives admits to a hospital and have to visit him. You will rush to get an instant ticket in loan with your friends. But it will keep you under the stress of debts. So, it is better to have an emergency fund to back up such adversity in life.

    viii. If unexpected things happened in life

We may be a victim any adverse situations. If we are not ready beforehand, we will lose what we have earned and have at our hands. The unexpected things may be road accidents, natural calamities (earthquake, landslide, flood, drought, famine, etc.), house fire, funeral costs, and many more. I know the emergency fund may not help you in all the adverse situations of life because sometimes, there may be required thousands of rupees to restore your life at an earlier stage, but it may help you to some extend. It is something better than nothing.

3. What is an emergency?

I hope that you understand why do you need an emergency fund. So, here, we'll learn about financial emergencies. 

Financial emergencies are unexpected and unpredictable situations of life that demand a stash of cash to pay for the loss instantly at any cost. Your emergency expenses must be related to your financial future, health and assets. I can't illustrate it precisely, but give you some idea to identify your financial emergency.

Here are a few illustrations that make sense of true financial emergencies that you need to expense:

• When you are fired out of your job or have no monthly income
• When one of you get a severe health issue
• When there is a sudden unexpected car breakdown or accident
• When a family member passes away
• When a sudden unexpected problem with your house like roof, electrical system, air conditioner, etc.

4. What is not an emergency?

Generally, we assume emergencies randomly without knowing the fact. You know, the emergency fund is there to help you pay for emergencies. But it is foolish to use the emergency fund for your luxury lifestyle or whims. You should not splurge any money into such situations of your life breaking into the emergency fund.

Here are some illustrations helping you to get an idea so that you should not expense in vain.

• You want to buy a new TV, Car, etc.
• Elective healthcare as plastic surgery, cosmetic surgeries, or that is not necessary genuinely.
• You want to travel out of budget, a cruise vacation.
• A last-minute request for you to go with your friends may be a wedding party, trip, vacation, etc.
• You can replace your worn-out carpet, sofa, bedsheet, etc. in your home (this must be budgeted, is not an emergency)

5. What are the types of emergency funds?

Based on my understanding, there are two types of emergency funds, namely:

i. short-term emergency fund 

ii. long-term emergency fund.

Let's understand clearly and deeply.

    i. Short-term emergency fund

The fund prepared for any minor unexpected expense like car repair, minor injuries and medical emergencies, etc. However, it is advisable to save an emergency fund for at least three months. So that you can run your family for three months even if you don't receive a regular paycheck.

    ii. Long-term emergency fund

It may be unexpected situations of your life that job loss, business loss, major medical emergencies, death in your family member, etc. You must be ready to face such an adverse situation of life beforehand. It would be great if you can save money for at least a year. You can run your family without having any problems for one year so that you can find a way to make money without any stress.

You may like this: Start a YouTube Channel and make money online 2021

6. What are the benefits of emergency funds?

Almost we understand the benefits of emergency funds already above. But here, I will illustrate apart from above, which are listed below:

    i. Earn interest:

We hear a saying that money makes money. When you have saved money for an emergency fund and don't get any emergency for a certain period, you will earn some interest. However, it depends upon the type of accounts you are saving in.

    ii. Avoid costly debts:

It is one of the main benefits of having emergency funds. Who knows about our emergencies that can pop up anytime. If we don't have emergency funds put aside in a bank, debts may pull down our life completely. So, if we have an emergency fund, we can cover up any emergencies that need thousands of rupees to pay for it without any stress and taking any credit with friends and relatives.

    iii. Peace of Mind:

Peace of mind is one of the most precious things in our life. When you don't have peace of mind within you, you cannot manage anything that brings you stress and worries. Thus, it helps you to improve your self-confidence struggling with any unforeseen expenses.

    iv. Keeps you from spending on a whim:

You know, we have unlimited desires that we cannot fulfil at once. It is like seeing the sun on the horizon. But, when you keep the money as an emergency fund, you will ensure your expenses and track your savings. Thus, it will help you control spending on a whim, no matter how much you want to own it.

    v. Ensure security of your future:

When you retire from your service, the emergency fund may help you to protect your retirement savings apart from emergency expenses. It prevents you from taking a loan.

7. How do I know about my required emergency fund?

I can't say precisely the size of your emergency fund. While it depends upon the size of your monthly expenses, lifestyle, income, the rule of thumb is to put away at least three to six months' worth of expenditure. For example, if you earn ₹ 20,000/- per month and you have ₹ 10,000/- monthly expenses. It can be somewhere 30,000 to 60,000 and above.

8. How much should I save money each month for the emergency fund?

There is a formula to save, i.e. 50:30:20 budget rule. It means out of your monthly income, 50% on your needs, 30% on your wants, 20% on your savings. You need to accommodate your monthly expenses like groceries, milk, electricity bill, etc., within 50% of your monthly income.  Similarly, you need to adjust your wants, like hanging out with friends, buying new appraisals, shoes, etc., within 30% of your monthly income. And finally, you need to save the rest 20%.

But out of the 20% savings, save 10% for emergency fund every month and the rest 10% for any budgeted plan.

For example, if you earn ₹ 20,000 per month, ₹ 10,000 for your needs (you should not cross this line. If you have more monthly expenses, try to minimize it and bring it down to the limit.), ₹ 6,000 for your wants (if it is a large one, you need to budget this), ₹ 2,000 goes to your emergency fund and the rest ₹ 2,000 goes to your budgeted plan.

9. Where should I put the money?

The best place to save emergency funds is an interest-earning bank account accessible easily without any taxes or penalties. Do not put your emergency savings into any mutual funds, stock markets, share markets, etc., and you will lose value if the market gets down.

It is advisable to use the 15:15:70 emergency fund saving formula that 15% of your emergency fund is to be cash in hand, another 15% of your emergency fund in your saving account, and the rest 70% try to put in a liquid fund or Fixed Deposit (FD).

Tips: Open your two bank accounts in different banks. And one is used for saving your emergency fund. Another is for your regular saving or salary account. Do not your emergency account for buying online shopping or money transfers. If you use your emergency fund, try to refill or cover up in the next few months.

10. When should I use this money?

Emergency funds should be used by you when there is an emergency. Do not withdraw any money from emergency savings until there is an unanticipated situation in your life. But if you have enough money in your emergency fund, you draw some amount for any budgeted plans. However, you will then know how much money to replenish the account. After withdrawing some amount from the emergency fund, you must start rebuilding it instantly. Else, you can't meet the next emergency that occurs.

11. Conclusion

In conclusion, emergencies are an inevitable predicament of our life that happens to anyone at any time. So, it is highly advisable to keep your extra money in emergency funds and be ready to face and bear any unexpected situations in your life. Live your life freely without any stress and worries.