Building an emergency corpus is the first step in financial planning. For those of us who have neglected this advice, the current coronavirus crisis is a wake-up call. As India goes into lockdown and nobody is quite sure when things will be back to normal, many of us may be faced with delayed income, job losses and other situations that affect our finances. Now, more than ever, it is time to build an emergency fund. Here is how you can start building an emergency fund right away.
Have a goal in mind: The benchmark is to save for three to six months of your expenses. When you calculate this, include the bare minimum expenses, the ones you cannot do without even if you cut down most discretionary costs. Do not forget to include costs like EMIs and insurance premiums. Once you have done the calculations, you know how much you want to save. Knowing that you want to save Rs 3 lakh in your emergency fund is much more specific than just saying that you want to build an emergency fund.
The money should be liquid: You should put the money in such a place that you can access it as and when you need it. One of the ways to park your emergency fund is to use a savings account. However, keep such funds in a separate savings account, so that you do not tend to withdraw from it. The other option is to park your money in liquid funds which, as the name suggests are liquid and also give you a higher return on your money than a savings account.
Build the emergency fund: Once you have decided how much you need and where you will park your money, you need to work towards building the fund. Remember, that it will take a while, but you can build an emergency fund faster by doing a few things. The first thing you need to do is to cut down on discretionary expenditure. This includes eating out, movies and spending on things that are not a necessity. In times like this, as most of us work from home and cannot go out anyway, it is all the easier to contribute towards building an emergency fund. Here, it is important to have a budget so that you know where your money is going and the necessary savings you can make. Apart from that, you should also set up a system so that you can move money into your savings account automatically every time your salary comes in. This is because if you leave the savings for later, you would end up spending all your income. Money such as a bonus or a tax refund should also go into an emergency fund.
Remember that you can dip into an emergency fund only in times of an emergency like a job loss or a delay in salary or medical issues that requires immediate funds. Also, do not stop even when you have reached your target, as an extra cushion will give you added protection.