How To Start And Keep Emergency Funds

If pandemic has taught us one thing, it is that one cannot see how unexpectedly a turn of events can take place in life. The coronavirus crisis has made us realise that we should be prepared for emergencies as there is no knowing what they can be. Lakhs of people lost their jobs or are facing salary cuts because of the COVID-19 pandemic.

This has been a tough situation for most especially after they found out they had no emergency savings.

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In cases of say medical emergencies or job loss one needs to have an emergency fund one can rely on and it is important that you start saving for that.

The following steps will help you start an emergency fund. Creating one might take some time but that is nothing to stress about. All you need is a plan and everything else will fall into place.

Baby steps

¡°Every financial expert sets some number as a benchmark for emergency funds¡ªanywhere from three to six to 12 months of expenses,¡± says Kerri Moriarty, head of company development for Cinch Financial, a Boston-based startup building financial software. ¡°For most people that¡¯s just downright aspirational,¡± especially, she adds.

Saving for as long as six month worth of expenses can seem like a huge task. That is why it is important to start with small steps and then eventually move up to a long-term objective.

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First start with a small amount that you want to set aside for an emergency fund, say Rs. 35,000 then slowly keep increasing the amount until you see yourself covered for first three months then six months.

Place to keep your emergency fund

The idea of the emergency fund is to have quick, easy access to cash when in need. For that, you can consider keeping at least the first three months¡¯ worth of expenses in a high interest savings account so that you can access it at any time. You could put any additional funds into low risk, high liquidity vehicles like a money market account or a certificate of deposit (CD).

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¡°Not only should you keep emergency funds in a separate account from your regular checking and savings, but it¡¯s even better to keep them at a different bank entirely,¡± Moriarty says. ¡°Keeping them at a separate bank reduces the temptation to draw from them when you¡¯re checking the balance of your other accounts. Out of sight, out of mind¡ªuntil you really need them.¡± So there you go, do not keep checking in the amount of your emergency fund, focus on increasing it.

Make contributions automatic

To actively contribute to your emergency fund you will have to set aside certain percentage of your salary income for it. That amount should directly go to your emergency fund

To do that you can either set up an automatic deposit on payday or a separate direct deposit with your employer as part of the steps to start an emergency fund. That way an amount will automatically be deducted from your salary and you will not be tempted to spend it.

Once you have started your emergency fund do not just stick to one source of deposit. Get creative to build your account even faster.

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¡°When you start an emergency fund it can be challenging, but every few dollars helps,¡± says Brooke Petersen, investment consultant at Conrad Siegel, an investment advisory firm in Harrisburg, Pennsylvania. ¡°Fund it with pay from extra working hours, a tax refund or part of a raise. Alternatively, bring your lunch to work a few days a week, or brew your morning cup of coffee at home.¡±

Basically, apart from a percentage of your salary, you can deposit some of your savings here as well. Remember this is not your savings account but an emergency fund. While you can dig into your savings to say, buy a new car, emergency fund is strictly for emergencies.

Continue building

Finally, if and when you have reached the long-term goal for your emergency fund, it is important to not stop. Your expenditure in life might change as you progress- get married, have a family. In that case your monthly expenses might increase and you need to account for it.

The six months¡¯ worth of expenses you originally saved may no longer be enough to cover you.

Also if at any point you tap into this account, then you will need to replenish that amount too.

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Think of your emergency fund account as an insurance for you and your family. Just like you have health insurance in case you get sick, car insurance so that you¡¯re covered in an accident, an emergency fund is for when/if something unplanned or unexpected happens. It is your safety blanket.

¡°The primary investment objective for your emergency reserves is safety, not return,¡± Petersen says.

By starting an emergency fund as early in life as possible you can avoid financial problems later.

Take baby steps as mentioned in the very beginning and you will have established an emergency fund sooner that you would think.

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