Setting Up An Emergency Fund
Putting money aside for an emergency fund is a wise decision in case of unforeseen financial difficulties. An emergency fund is widely regarded as an essential component of any sound financial plan, and it is recommended that everyone have one. It’s also one of the first steps you can take to get started with your financial planning.
You can accomplish this by following these steps
To begin, figure out how much money you’ll need in your emergency fund. An emergency fund should contain an amount equal to three to six months’ worth of living expenses, at the very least. One method is to start by investing in Overnight Funds, which are short-term investments. Later, you can transfer your financial resources from Overnight Funds to Liquid Funds by utilizing the Systematic Transfer Plan [STP] to accomplish this. By choosing the STP, you will be able to take advantage of market fluctuations and shift your investments to securities that provide higher returns. Furthermore, it can protect your interest during periods of market volatility and help you to reduce your investment risk.
Start with a budget to see how much money you can save in the long run. A budget plan will assist you in determining where your money is going and will allow you to identify potential savings opportunities. You may not be able to maximize your money and find ways to reduce or manage your expenses if you do not have a budget in place.
Make use of your savings to begin a systematic investment plan in a liquid fund
Using the SIP feature, you can ensure that your investments are made on time with the help of an auto-debit mandate, as well as that you do not forget to put money aside as it is automatically deducted without your intervention. Look into different options for lowering your expenses to see what works best. Over time, you may discover that you can free up additional funds by eliminating certain expenses from your budget. Tip for planning: Do you really need all of those automatic subscriptions that you don’t use on a regular basis? Do you have a requirement to order food three times per week? As a result, when you eliminate those expenses from your budget, you have more money to put towards the creation of an emergency fund.
The emergency fund is one of the components of the personal-finance “Basics.” Covering your ‘Basics’ is an important aspect to consider before beginning any investment endeavours of any kind. But what exactly are the ‘Basics’?
The term “basics” refers to having enough of the following: –
- Fund for Emergencies
- Protection Against Illness
- Insurance for a specific period of time
- What is an emergency fund, and how does it work?
An emergency fund is a sum of money that is collected and set aside in order to deal with any unforeseen events that may occur in the future. Unexpected events such as job loss, a sudden decrease in income, or any sudden financial liability, as well as a temporary loss of income due to a temporary disability, are all examples of unforeseen events.
Life is unpredictable, and unexpected emergencies can occur at any time. It is always preferable to be prepared in the event of an emergency. An emergency fund serves as a backup plan for individuals, allowing them to remain well-prepared in the event of a financial emergency. Any unexpected expenses can be covered by this financial cushion, which does not deplete the assets or investments held in escrow.
What amount should be set aside for an emergency fund?
If we follow the general rule of thumb, one should have enough money to cover at least six months’ worth of monthly expenses. When putting together your emergency fund, keep the following two things in mind:
In this fund, make sure to include any EMI payments and insurance premiums that may be incurred. Keep in mind that your investments and other assets are not included in this emergency fund. It’s a separate account set up for unexpected expenses. The greater the amount of money in your emergency fund, the better prepared you are for any unforeseen event.
What should I do with my emergency fund? Where should I put it?
One of the most important aspects of an emergency fund is its ability to maintain liquidity. Consequently, it is recommended that this fund be held in liquid options that allow for easy access to the money.
Listed below are the most highly recommended methods of preserving your emergency fund
- Savings account at a bank
- Liquid funds and overnight funds
- Reduce your recurring expenses
- Consider starting a second or third business
1. Savings account at a bank
For many investors, this is the most common method of saving money. Your money is safe in this account, though you should not expect any returns from it.
For an emergency fund, it is recommended that you set up recurring deposits in your bank (or post office). Through RD, you can gradually accumulate a sizeable sum for use as an emergency fund.
Short Term Bank Fixed Deposit: When compared to a simple bank savings account, a short-term FD offers greater liquidity, greater security, and a higher rate of return.
2. Liquid Fund And Overnight Fund
These are the most highly recommended investment options for any individual or institution. Investing in very short-term debt market instruments such as treasury bills, government securities, and other similar instruments is what liquid mutual funds or overnight funds do. The rate of return on liquid funds is higher than the rate of return on fixed-income or real-estate investments.
Cash can also be used, as many people prefer to keep cash on hand in case of an emergency. However, this method is risky and does not provide any kind of return. Individuals can distribute the amount of their emergency fund between cash at home, liquid funds, and bank accounts. This would provide a greater level of liquidity and convenience.
Maintain (or increase) your emergency fund so that you are prepared to deal with situations such as the current pandemic or other unforeseen circumstances. The foundation of any individual’s financial plan is a set of emergency savings funds. Despite the fact that you cannot suddenly come up with a large emergency fund, it is possible to begin saving money right away. It can become extremely difficult to set aside a portion of your monthly earnings for an event that is completely unpredictable. Simple strategies to help you save money every month and contribute to your emergency fund include the following suggestions:
3. Reduce your recurring expenses
Starting with your daily expenses, you can reduce your spending and put the money you save into an emergency fund. Simply limiting the number of times you eat outside, purchasing groceries in bulk, using air conditioning only when absolutely necessary, and cutting down on luxurious expenses are all simple strategies that will enable you to reduce your everyday expenses. Transfer all of your ‘bonus incomes’ to your emergency savings account.
In the event that you are unable to reduce your expenses any further, you may want to consider utilizing ‘bonus incomes’ to supplement your emergency fund. These additional earnings may include commissions from your job, cash from the sale of unused household items that you will not use in the future, and envelopes that you receive on your birthday.
Things that you will never use again should be sold – Selling items that you know you will never use again is a simple way to generate additional income. Some of these items may be antique showpieces, antique books, antique chargers, and so on. You can do so quickly and easily through websites such as OLX.
4. Consider starting a second or third business
Increasing your income is a proven method of increasing your emergency fund quickly and efficiently. In order to earn additional income, you could start a side business, work overtime, or work on weekends. This will allow your rainy day fund to grow at an accelerated rate.
If you haven’t already, you should start putting money aside for a rainy day fund immediately. It’s never too late to start, and even if you start today and work diligently to grow your fund, believe me when I say that you’ll have a substantial sum of money saved as a contingency fund.
In Conclusion, Setting Up An Emergency Fund In 2021 starts with you knowing where to look for your future savings. Today, many people struggle financially because they have a hard time saving for the future. Many people go months without investing for the future, even though they know it is important. Your money should be in a savings account with a good interest rate for the long term.
You need to make sure you invest your emergency fund and not just pass it on to your children or grandchildren. It takes generations to build wealth. The longer you wait, the worse off you’ll be financial. It is easier to start investing when you are young so start now. If you wait until tomorrow, the longer it will take to build your emergency fund.
Once you decide what you want to do with the money, research your options. Check with your employer, their 401k’s, the government, and non-profit organizations. Some of these may be better choices than banks. Non-profits tend to have lower overhead and are sometimes a better choice for finding grants. They are also often more likely to accept your application.
Check out your financial statements and make a list of your expenses. List your income as well. Then take that list to a financial advisor who can help you analyze it and advise you. You’ll find that most advisors are honest but many are trying to sell you something.
There are several ways to save for the fund. You can save by saving right now. You may not see immediate results but if you continue to save every month your fund will grow. You can also save for your future by investing through index funds or mutual funds. Both of these methods will generate dividends periodically, which you will earn interest on.
With today’s economy, now is a great time to establish an emergency fund. The fund can help you in tough times and provide money for education, medical bills, and anything else you might need. Don’t wait until it’s too late to save. Start setting up the fund today!
When setting up your fund, be sure you have a written plan for what you will do with the money once it has been established. It can be anything from paying bills to buying food, repairing your home, or just having a little extra money in your pocket to pay for an unexpected expense. When establishing the fund, it’s important to know exactly what you’ll be spending the money on. If you have large expenses, such as a house, then it’s probably wise to set the fund to invest in that area. On the other hand, if you have small expenses, such as food, then you should probably just put the money into an emergency account and use it for that.
One of the best things about setting up an emergency fund is that you have control over how the money is used. The worst thing could happen and you could lose everything you have invested. On the other hand, if you’ve done your homework and planned ahead, then you can use the fund to educate your children, save for your retirement, or get a loan for college. It all depends on you. Some people prefer to use the money for immediate needs, while others like to see the money go towards education.
Setting up an emergency fund is really quite simple. All you need is access to the Internet, a bank account, and a computer. Once you have these things set up, you can start saving money to use when you need it most. You can be confident that your money will be safe and secure in an Emergency Fund since you can use it to do whatever you need to do right away.
Written By @The Money Mail