An emergency may not seem big till the time there is no going back. This is where emergency funds act as a savior. The purpose of an emergency fund might be different in different cases, but the result is the same, and that is saving the day in need.
Let us dive deeper into understanding, “Emergency Fund: How Much Do You Need?”
What is an Emergency Fund?
An emergency fund is a pool of money kept aside for unforeseen situations that may arise from uncontrollable factors. The factors include losing a job, a medical emergency, any major repair, or any other unexpected emergency. Issuing a loan is not a feasible option during such situations, as it brings a sense of urgency. Instead of being dependent on other sources for money, emergency funds come in handy.
Why is an Emergency Fund Needed?
An emergency situation is impromptu in nature. It is better to be prepared than to take major action on the day of the event. Saving small amounts every month will help accumulate enough money to be used in case of emergencies. Also, it reduces the need to rely on any sort of loan, lenders, etc.
Emergency is essential to maintain the financial stability of an individual, even in situations when it is difficult to do so. Difficult times require taking simple measures consistently over a period of time.
Emergency Fund: How Much Do You Need?
The size of the emergency fund required depends on various factors. There is no universal number decided for such funds, as individual needs can be different, and hence the nature and size of the emergency fund. However, the following steps can be used to calculate the required fund in a situation of emergency.
- Identify the goal: Identifying the goal for which the savings are made is important. This will give direction to think and plan your finances. A goal for saving will also help in availing the benefit of government and other schemes that will boost the emergency fund.
- Analyse the level of risk: Thoroughly analysing your source of income and risk associated with it will help you find the size of the emergency fund that is appropriate for your needs.
- High-risk individual: Someone with an unstable job or high exposure to loss should have at least 9-12 months of expenses saved in the emergency fund.
- Low-risk individual: Someone with a regular source of income and less chance of risk should have at least 3-6 months of expenses saved in the emergency fund.
- Set targets: Setting monthly targets to contribute to the emergency fund will help you plan the budget effectively. It will help in making a clear bifurcation of the income earned.
- Expenses: Analyzing the expenses is equally important, as it will help in deciding the amount that needs to be in the emergency fund. It also helps in cutting down unnecessary expenses and making an effective budget.
- Alignment with lifestyle: Aligning the set goal with the risk associated and the lifestyle of an individual will give the basis of making the emergency fund instead of vaguely following any direction.
Bottomline
The conclusion can be drawn that emergency funds are more of a necessity rather than a choice. However, the size of the emergency fund may vary from individual to individual based on various factors and needs. The steps above help in finding the answer to the subjective question, “How much emergency fund is required?”
Emergency funds don’t stop emergencies, but they stop them from becoming financial disasters.
Written by: Tanya Kumari