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Emergency Fund

August 29, 2022

Building an emergency fund even when you are paying off debts is essential, so that you are not going into MORE debt to try to pay for an emergency. Plus, it's better for your mental health to know you're covered on rainy days.  

Let’s be honest, shit ALWAYS hits the roof when we least expect it.  

Don't worry, we got you covered! Find this article as a roadmap with specific & relevant information on all things Emergency Fund.

Now go get some coffee, a pen & a notebook, we might have some math to do.  

Firstly, what is an Emergency Fund?

An emergency fund is a safe stash of money that one can use in unexpected circumstances; it provides a sense of financial security for individuals during times of difficulty and as we said earlier – shit always hits the roof when we least expect it to, one may lose their job, have a medical emergency or your car/house needs a repair, not to forget an economic crisis due to a pandemic (I mean, who saw that coming?)  

Without an emergency fund

How much do I need in an Emergency Fund?

In addition to your financial situation, expenses, lifestyle, and debts, many such factors determine the size of your emergency fund. To elaborate, your personal circumstance may dictate the specific savings level with which you are comfortable. For example, the singles out there without dependents may look to save for 3 to 6 months of living expenses, while the same might not be true for a person who sends remittances to their families or is the sole breadwinner.  And if you're at the moment living paycheck to paycheck, you might want to start with more flexible goals, like setting aside 2-4% of your overall income, and then gradually increasing that amount every few months. Should you experience an unforeseen financial meltdown, even a tiny safety net can help you buy some time.  

At Dinero we always believe that magic happens when you take the first step - it stands true especially for saving & investing

How to build an emergency fund in India?  

  1. Always set a goal, no matter how small or big it seems
    Start with saving 3 months of living expenses: Calculate for 3 months – How much of your income goes for rent, food, commute, remittance etc.  

    Note: We are not talking about saving 3 months of income.

    For example: Your living expenses per month are Rs. 25000, multiply with 3 you get 75K.  
    Therefore, you can start saving approx. 20% of your monthly income till it amounts to Rs.75,000.  
  1. Creating a system by automating your savings
    This minor step helps you become accountable while building the habit of saving money without much resistance.  
  1. Now, where do you put all this money?  
    When you are choosing the right place to save or invest in an emergency fund, two main factors to consider here are low risk & high liquidity. This could be Liquid FD, Liquid MFs etc.  
  1. Remember to extend it up to 6 months  
    Once 3 months of living expenses are saved, you will now be confident & feel more secure, take the leverage and extend savings up to 6 months depending on other financial goals you have already set.

Manage your income

As you are diligently building your safety net, you are cultivating a financial habit that would change the way you deal with money – A habit for a better life & a better tomorrow, while you are at this keep an account of your monthly budget as money management overall is an essential skill, we all can develop.  

This will also open room for more income, start exploring your options of wealth creation, check out if you have space for a side hustle, or any of your hobbies that can bring some cash home.

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