How to build an emergency fund?
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How to build an emergency fund?

  • Highlights

  • Emergency funds help you fund unexpected financial needs

  • Determine your emergency fund needs and invest smartly

  • Choose investment options offering liquidity and stability

  • Investing in Fixed Deposits helps you keep your funds safe

Tackling unforeseen circumstances such as medical emergencies, loss of job, home renovations or automobile repairs can be challenging. Such circumstances warrant immediate financial action, which could strain your existing cash-flows or deplete your savings.

To prepare for such situations, you can build an emergency fund by setting aside a part of your income. An emergency fund enables you to handle unexpected financial needs, without straining your regular cash flows or disrupting your financial plans.

Here’s a lowdown on five good practices to invest in emergency fund:

1. Determine the fund amount you need

Ensuring a disciplined cash management strategy can help you determine the amount of fund you can invest. With adequate cash reserves, you can set aside a good amount of funds to create an emergency fund. Here’s the best approach to help you get started:

- Evaluate: Start assessing your monthly income streams and expenses, which will give you better clarity about how much you can save.

- Save: Once you get a better idea of your monthly income and expenditure, you can look at ways to curtail additional expenses. Prioritise your financial expenses, and seek more ways to save your funds.
- Invest: Any excess cash in your budget must be directed towards investments, so you can put your money to work for you.

2. Choose the right investment options

When investing to create an emergency fund, it is best to choose the right investment options that are:
- Easily accessible
- Earn higher returns on your savings
- Safe from market fluctuations
- Stable and reliable

You must choose safe investment options like Fixed Deposits, where you can look for stable returns, greater flexibility and safety.

3. Automate your investments

When creating an emergency fund, it is best to schedule payments from your primary account, so you can have a portion of your income diverted towards your emergency fund. This is especially helpful when you invest in Recurring Deposits, so you don’t have to remember to direct your funds towards emergencies each time.

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4. Invest in Insurance

An insurance works as a safety net in case of emergencies, which enables you to handle situations like medical emergencies, theft or sudden home or automobile repairs. Choose a reliable insurance provider, and be realistic in assessing your insurance needs with sufficient coverage.

5. Use only in emergencies

It is important to have well-defined criteria for using your emergency fund, so your instinct for instant gratification doesn’t result in depletion of funds you’ve accumulated over the years. Hence, creating an emergency fund requires greater financial discipline than fiscal prudence.

You can start investing in Fixed Deposits, as they come with easy access, stability and flexibility. You can start investing with just Rs. 25,000, when investing in Bajaj Finance Fixed Deposits. This enables you to maximize your returns and make most of your investment amount.

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