Tuesday, May 17, 2022

How much should you save for emergencies?

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Shreya Christinahttps://cafe-madrid.com
Shreya has been with cafe-madrid.com for 3 years, writing copy for client websites, blog posts, EDMs and other mediums to engage readers and encourage action. By collaborating with clients, our SEO manager and the wider cafe-madrid.com team, Shreya seeks to understand an audience before creating memorable, persuasive copy.

Emergencies are unforeseen by nature and when they happen they can distract you from your financial resilience. A sudden illness or traffic accident, unpredictable job loss, or even an unavoidable home or car restoration can destroy your family’s daily cash flow if you’re not rested.

While emergencies cannot be avoided, holding emergency funds will help you avoid facing the financial difficulties of trading with these contingencies.

What is an emergency fund?

An emergency fund is different savings account which is incorporated in a bank or financial institution. It is used to protect or offset the expenses of unpredictable life events. It shouldn’t be viewed as additional savings or added up as part of a long-term savings strategy for college education, a new car, or a vacation. Instead, this fund acts as a safety net, which can only be used in the event of an emergency.

How do you build your emergency fund?

It’s not rocket science to understand how to save for emergency funds. Understanding your income and expenses and the amount of money that you can sustain for at least 2 to 3 months is sufficient as an emergency fund.

You can open a zero balance savings account and keep your saved money in the account. The money can be used to its fullest and the amount can be sustained with a minimum balance as negligible as zero.

How much should you put into the emergency fund?

You want to be able to afford an unforeseen restoration. Yet it is also essential to have enough money for at least three months if you find yourself in an unavoidable position under any circumstances.

Let’s say you lost your job or broke up with your co-worker and took some time to get back on your property – it will cost a little more than the price of a new water heater or microwave.

All the funds saved will help you if you have to settle for something you didn’t expect.

A handy rule of thumb to give yourself a substantial financial buffer is to have at least three months of necessary expenses in an immediately accessible savings account. For example, if you lose your job, you get three months of savings to keep going

So, if you buy Rs. 20,000 per month in mortgage or rent, meals, electricity bills and other necessary expenses, you should aim for at least Rs. 60,000 in emergency savings.

There are 3 important aspects listed below to consider when creating an emergency fund and when to use them.

Income

Income is the biggest factor in determining the amount you will need in times of need. Save at least 3 to 6 months of your salary as an emergency fund to maintain well in times of unforeseen circumstances. It is not advisable to save the amount all at once and settle for a lower standard of living, but saving slowly and steadily is a good plan for such a time.

Insurance

Another important thing that you need to save money for is insurance. You must always have your assets and medical expenses insured. Investing in insurance is a form of emergency funds that will help you in times you did not expect.

Debt

Last on the list are any debts. You need to start pooling some money as an emergency fund to settle all your past debts or loans. EMI, insurance premium and more are some of the amounts to be saved and given on time. These emergency funds help you to manage them well.

When should you use the emergency fund?

The goal is to use your emergency savings only for payments directly related to an emergency. By putting a certain amount in that account, you know how much you need to accrue. When you call on the emergency savings, you know how much you need to contribute to replenish the bill.

When you need to withdraw money from this fund, it is essential to rebuild it immediately. It must be remembered that if you start saving from the present time, the money you save today can go a long way towards fulfilling your needs when the next emergency occurs. Click here for more details.

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