The situation with life is unpredictable. Some days you can be going straight and the next day, a medical cover, loss of a job or car repair may leave your whole budget dancing out of tune. That is where an emergency fund comes in. It is your financial backup net-preventing you against taking a breath when something unexpected occurs.

Establishing an emergency fund, however, is a challenge to say the least, when you are living on your monthly paycheck, or beginner in the financial world. The positive news? You do not even have to save a lot within a short period of time. You can make a small start and over time amass something that makes you sleep at night, with the right approaches and attitude.

We will actually guide you in this blog on how to actually save your emergency fund step by step.

What Is an Emergency Fund, Really?

So, let us begin with the fundamentals. Emergency fund refers to money that you save with the sole purpose to pay for the unexpected costs. They may be:

Medical emergencies
Job loss
Repairs of house or car last minute
Improper travel (such as an emergency in the family)
A large jump in rent or massive utility bill

Vacations, shopping, and planned expenses are not the reasons why this fund is set. It is in the event of emergencies- this would be when your usual income or savings cannot be used to pay the cost without getting you into debt.

Why Is an Emergency Fund So Important?

You may ask yourself: I have a credit card. Is that not sufficient? The thing is, credit may help in cases of emergency but lead into the vortex of debt. Emergency-fund:

Prevent you borrowing at high rate of interest
Gives psychological tranquility and assurance
Allows you time and then breathing space to reason out and make intelligent decisions during a crisis

It is like a savings buffer. It will not help to minimise the effect of an emergency-but it is certain to cushion it.

How Much Should You Save in an Emergency Fund?

It does not have a quick answer. It is determined by the way you live, income, dependent persons and costs. With that said, there is a rule of thumb in this:

Starter Basic Fund: 10 000-50 000 (suitable to beginner)
Moderate Fund: 3 months expenses on basic subsistence
Complete Emergency Fund: 6 months of needed costs

So, on your monthly needs (rent, bills, groceries, etc.) being 30,000 rupees, an emergency fund of 3 months will be 90,000 rupees.

At least 6-12 months of expenses should be the target for those that are self-employed, or with irregular income.

Step-by-Step Guide to Building Your Emergency Fund

Let's take it down a few rungs and make it easy & executable steps. No jargon. No pressure. Just progress.

Step 1: Understand Your Monthly Expenses

You must be able to know the amount you spend on a monthly basis before you know how much you have to save. Put accent on such essential expenses as:

Rent/ Home loan EMI
Facilities (utilities, electric, water, internet)
Groceries
Transportation
Loan payments
Simple health care expenses

Sum them all up and what you get is your monthly essentials. This is your guideline on the emergency fund.

Pro Tip: Month expenses tracking App or a simple Notebook Dedicate a month and keep a check on all the expenses. You may be surprised on the spending of your money.

Step 2: Set a Realistic Savings Goal

Determine the amount you would want your emergency fund to have based on the amount of money you spend every month.

It is best to aim at 10,000 (Rs)-25,000 (Rs) when you are new.
After you get to that point, aspire 1 months worth of expenses.
Increase it gradually up to 3 6 months.

The presence of mini milestones helps to remain less stressed and makes the process more comfortable.

Examples: When you are targeting 60,000 Indian rupees, divide it in 5,000 units of 12 months.

Step 3: Open a Separate Savings Account

To ensure you do not give yourself access to account that is there to facilitate emergency cases, try maintaining it in a different savings account.

Seek an account:

No fees
Accessible, yet not so easily accessible
An acceptable rate of interest
Zero-risk (you should not put this money in the stock market or mutual funds)

This is not money to invest in, this is money to safeguard you.

Pro Tip: In the name of the account, you can even call it Emergency Fund to help you be focused.

Step 4: Start Small and Stay Consistent

It does not mean you have to begin with large quantities. It is the question of consistency.

You can start with only 100, 500 or 1000 a week or a month. Make the savings automatic, where possible, so that you do not need to worry about it.

In one month, the difference of considering 2000 Rs. will be this savings of 2000 Rs. a month gives 24,000 Rs. in a year.

When you receive any bonus, cash gifts, and tax refunds, think of allocating a portion of that in your fund.

Step 5: Cut Unnecessary Expenses to Boost Savings

When it seems difficult to save, seek opportunities of minimizing expenses. A couple of examples:

Less dining out
Cancelling performances subscriptions
Reducing online shopping on impulse
Restriction of cabs and travelling on public transport

This does not require you to give-up everything rather, it simply means cutting on the fat.

Try This: Conduct a week of no-spend or weekend and use that amount to be added to your emergency fund.

Step 6: Use Windfalls and Extra Income

Surprise money, any bonuses, cash back, even fees in your work as freelancer can be a great boost of your progress.

Make at least 50 percent of any additional money go into your emergency fund rather than spending it all.

Bonus Tip: If you have old clothes, gadgets, or furniture, which you do not use, sell them. The money you earn can directly be put in your savings.

Step 7: Track Your Progress Regularly

Saving can be slow but following the progress can be a great boost.

Whenever you make a milestone, rejoice at that point. Write it, tick it off and/or tell someone who believes in what you want to achieve.

You may make use of:

A basic savings checksheet chart
An app that monitors your objectives
A journal to note on your wins

Motivation Tip: The ability to picture growth will keep you devoted and make you proud of the progress you have made.

Step 8: Don’t Use It Unless It’s a Real Emergency

After you begin your emergency fund, do not lose it.

Three questions will help you decide before using it:

Is this cost surprising?
Is it a matter of urgency?
Is it necessarily needed?

In case that answer regarding any of those is no, create other means to cover the cost.

Not to be used on: Vacations, shopping, dining out or routine bills.

Good in case of: Loss of job, hospital bills, emergency home repair, et cetera.

Step 9: Refill It If You Use It

And should you ever use your emergency fund (and that is fine, because the emergency fund is not labeled as not being allowed to be used) plan to replenish it sooner rather than later.

Again, it is just to make sure that you have your safety net in place so that the next time around that life hits you with a curve-ball you are still in position.

Step 10: Reassess Every 6 Months

Your costs may be affected, your standard of living may alter or your earnings may be diminished. Check your emergency fund after every 6 months to see whether it is sufficient.

When you get a raise or change the city where you live to one with a higher cost of living, then adjust accordingly.

Mark your calendar with periodic check-ups of your budget and emergency fund every six months.

Final Thoughts: Your Future Self Will Thank You

It is not merely about money when creating an emergency fund, but, rather, the comfort that comes with it. It is having a sense that whatever life brings to you, you have a backup. You’re protected.

It does not mean you should be rich or have everything to start saving. All you have to do is to begin.

Therefore, make that initial step of today. Either 500 or 5000, save up on it. The you that turns up to work on a bad day, loses the job, or gets an unexpected bill will appreciate you having done this so much.

Common Questions About Emergency Funds

What will happen in case I cannot save much at a present moment?

That’s okay. It is better than 0 rupees per week even with 100 rupees per week. It all begins by taking a start. Positive change instead of getting things perfect.

Should my emergency fund be at what location?

It is preferable to use a simple, high-interest savings account or a liquid mutual fund (though only in case you are comfortable). Don't make risky investments.