How to Build Your Emergency Funds?

Life is filled with uncertainties, and unexpected challenges can arise at any moment. Whether it’s a sudden job loss, a medical emergency, or unforeseen repairs, having a safety net in place can make all the difference. Enter the emergency fund – a vital financial cushion that offers peace of mind and helps navigate the stormy seas of life with confidence.

In this blog, we will explore the question that plagues the minds of many responsible savers: “How to build an emergency fund?” While there’s no one-size-fits-all answer, understanding the factors that influence the ideal amount can help you tailor your approach to building this essential financial reserve.

How Much Should You Put in Your Emergency Fund Every Month?

The amount you should put into your emergency fund each month can vary greatly based on your personal financial situation and expenses. However, a common rule of thumb is to aim for building an emergency fund that could cover 3-6 months’ worth of living expenses.

Let’s assume:

• Your monthly expenses amount to ₹40,000.
• Your goal is to have a six-month emergency fund, which equals ₹40,000 x 6 = ₹2,40,000.
• You already have ₹20,000 saved in your emergency fund.

To reach your target of ₹2,40,000:

• Subtract your existing savings from the target: ₹2,40,000 – ₹20,000 = ₹2,20,000.
• Divide the remaining amount you need to save by the number of months: ₹2,20,000 / 12 = ₹18,333.

So, in this example, you should aim to save ₹18,333 every month to reach a total emergency fund of ₹2,40,000 within a year. Adjust these calculations based on your own expenses and financial goals.

This can feel like a huge number, especially if you’re starting from scratch, but it is not really that difficult to put together. The important thing is to start putting some money aside every month.

Things You Need to Consider While Trying to Build Your Emergency Fund

The amount of money you should put in your emergency fund depends on your individual financial situation, including your earnings and expenses. While there is no one-size-fits-all answer, here are some general guidelines to consider:

• Expenses: As a rule of thumb, financial experts often recommend having three to six months’ worth of living expenses in your emergency fund. This means you should calculate the total amount you typically spend on essential living expenses each month, including rent/mortgage, utilities, groceries, insurance, transportation, and any other necessary bills. Multiply this monthly expense amount by the number of months you want to cover (e.g., 3 or 6) to determine the target for your emergency fund.

• Earnings: The amount you put in your emergency fund should be based on your earnings and cash flow. If your monthly income allows for it, aim to save a portion of your earnings each month until you reach your target emergency fund amount. If your income fluctuates or is irregular, try to set aside a fixed percentage or a set amount from each paycheck.

• Risk tolerance: Your risk tolerance and personal circumstances may also influence the size of your emergency fund. If you have a stable job, secure income, and a lower-risk lifestyle, you might feel comfortable with a smaller emergency fund. However, if your income is less stable, you work in a high-risk industry, or you have dependents, you may want to aim for a larger emergency fund.

• Existing savings and debt: Take into account any existing savings or debts when determining the amount to put in your emergency fund. If you have high-interest debts, prioritize paying those off before fully funding your emergency fund. On the other hand, if you have some savings, you can allocate a portion of it to your emergency fund and continue to build from there.

• Cost of living and commitments: The cost of living varies depending on where you reside and your individual lifestyle. Take into consideration your specific financial commitments, such as rent/mortgage, loan payments, and other fixed expenses, to determine the appropriate size of your emergency fund.