Amid fresh budget revelations, India’s workforce continues to struggle with employment.
Almost 2 years on, Indian consumers are still reeling from the aftereffects of national lockdowns; with many of them either losing their jobs or small businesses.
While more workers have amped up their savings during the pandemic, many are still finding themselves financially unprepared and illiterate on simple steps they can take to stabilise their finances- including building an emergency fund.
Also referred to as a rainy day fund, an emergency fund can provide financial security in your job and insulate against the unexpected. Yet, many say they do not have an emergency fund because they do not know where to begin.
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While it may seem daunting, kickstarting your emergency fund does not have to be complicated.
Set a Target Date and Target Amount for Your Emergency Fund
Before you can begin building an emergency fund, it helps to know how much you should have in your emergency fund and a timeline. The amount of your emergency fund will depend on several personal factors including your household income, number of dependants, and outgoings. Generally, experts recommend aiming for 6 to 9 months of expenses.
Focus on your fixed expenses as these will continue to be incurred regardless of any change in your circumstances. This can include rent or mortgage payments and car loan payments. Next, be sure to include essential variable expenses in your calculations such as basic food costs, clothing, and travel expenses.
You may also want to think about where you want to save your emergency fund. Many people opt for a savings account thanks to its liquidity and ease of access, which means it can be accessed whenever needed.
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Automate Your Savings Like a Paycheck
When creating an emergency fund, it helps to have a separate bank account for it. This helps to eliminate any confusion or temptation to spend your savings during those tough times.
To ensure you keep up with regular payments and avoid the temptation to spend, you can also automate a debit from your account once a month to a dedicated saving account for your emergency fund. Consider your monthly paycheck and bill dates when scheduling this automated debit.
Ideally, it should be deducted after your main bills have been deducted but before any discretionary spending takes place to avoid overspending. You can also redirect bonuses, lump sums, and extra money at the end of the month into your emergency fund to help you reach your goal faster.
For instance, you can redirect your untouched vacation money to your emergency funds if you have found your travel plans affected by the pandemic. Similarly, employees who benefit from an annual bonus at their companies can add this to their emergency fund to build it up.
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Learn to Leave Room for Recreational Spending to Avoid FOMO
A common downfall for those trying to save is the tendency to focus on savings aggressively and neglect to leave room in their budget for regular treats or luxuries. While it is a good idea to get an emergency fund in place sooner rather than later, leaving no money for recreational activities you are used to can easily backfire and lead to a binge spending spree.
Instead, cultivate a sustainable approach to saving that you can uphold in the long term. This is especially relevant since maintaining your emergency fund will be a continuous process.
From time to time, you will find yourself dipping into your emergency fund and then having to rebuild it again. A good alternative is to cut back on recreational spending like dinners or subscriptions but still allocate money in your budget for a treat weekly/monthly.
In times of uncertainty, an emergency fund can provide some much-needed comfort and stability while you adjust. However, to benefit from it you must plan and the sooner you get started, the better prepared you will be to expect the unexpected.
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