Emergency Savings Fund

 Emergency Savings Fund

Starting an emergency savings fund is one of the important things in your personal finance.   One of the main aspects in your financial planning is allocating a certain percentage of your savings for the emergency purposes.  Many personal finance experts agree that this is one of the first things you should do, ranking ahead of paying off high interest debt. This article will cover why you need emergency savings, how much you need, and where to put it.

Why Save for Emergencies?

There are a number of situations that arise in life that you simply do not have control over. Should these situations require immediate cash flow, it is essential to have emergency savings to cover it. If you have a personal investing account or retirement account you could pull funds from these, but for a number of reasons including bad market timing, early withdrawal penalties, or a delay in the liquidity of actually selling your investment and receiving your funds, this is the last thing you want to do.

Having money set aside for emergencies not only prevents this from happening, but also gives you the peace of mind that if something unfortunate was to happen that you will have a little financial cushioning to ride it out.

What Types of Situations May Require Emergency Savings?

I’m sure that you have needed fast cash for a number of situations in your life, or seen situations where others have. Insurance may cover many of these scenarios for you, but there is always a chance that it won’t cover fully what you will need. Here are a few examples:

a)       lost job or layoff

b)       began a new job that required you to expense a geographic move

c)       auto accident, auto retirement, or major repair

d)       Major home expense such as a broken water line, tree falling on your roof, fire, natural disaster effects, etc.

e)       death in family that required you to help pay for funeral and other expenses

f)        unexpected medical expenses not fully covered by insurance

How Much Should you Put in Emergency Savings?

This is where the experts tend to differ. There are a wide range of guidelines out there for how much you should save. Pick one or a combination, but ultimately, you have to choose an amount that you’re comfortable with and that feels right for you. Here are some of the general guidelines out there:

A)      2-3 months worth of take home salary

B)       6 months worth of living expenses

C)       Start small and pay off debt before building 3 to 6 months worth of living expenses

I think it is wise to earmark 2-3 months’ salary for emergency purposes. Start Focus on paying off high interest debt, paying all of those off first before adding to your emergency savings is not a good idea.  Here’s where the twist comes in – if you are anticipating a major life changing event coming up, add to your fund or simply another savings account. You do not want to be pulling from emergency funds to pay off anticipated expenses.

Where should you put your Emergency Savings?

You should be earning interest from your savings, otherwise, you are losing value due to the effects of inflation. Place your emergency fund into a high interest savings account, checking account, or money market mutual fund schemes.   Stay away from Bank Fixed Deposits because if you pull your money out prior to the FD maturity date, you will lose interest in the form of a penalty. SWEEP in deposit is another alternative.

Go with a bank that offers quick and easy access to your fund and a competitive rate. Always open bank accounts with reputed bank providing good services and modern technologically advanced  facilities like online banking, ATMs etc.   Use this as a starting point to see what the current savings bank  rate is before committing. Check back periodically to see if you’re getting the best going rate (because recently RBI deregulated the savings bank rates, so the banks can change the SB account interest  rates at any time at  their description) . If you’re not, don’t be afraid to switch. If you haven’t already, start building your emergency savings. It will help you sleep better at night.