How to Build Your Emergency Funds?

byDilip PrasadJune 7, 2024
Why It is Important to Create an Emergency Fund?

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.

One important thing to remember while calculating your monthly expenses is to consider EMIs and insurance premiums that need to be paid.

How to Calculate Emergency Fund?

Monthly expenses (Rent + Food + Clothing + Children School Fees + EMIs + Mis)* 6 Months = Emergency Funds

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.

In conclusion, establishing an emergency fund is an essential pillar of sound financial planning. By diligently setting aside a portion of your income every month, you can build a safety net that offers security and peace of mind during life’s unpredictable moments. Remember, there is no fixed formula for determining the exact amount to allocate to your emergency fund, as it depends on individual circumstances such as income, expenses, risk tolerance, and future goals.


How do I calculate the ideal amount for my emergency fund?

Calculate your monthly living expenses, including rent/mortgage, utilities, groceries, and other essentials. Aim to save three to six months' worth of these expenses in your emergency fund.

Is there a standard rule for how much to save each month?

While there is no fixed rule, financial experts suggest saving at least 10-20% of your income each month for emergencies. Adjust the amount based on your financial situation and risk tolerance.

Should I invest my emergency fund to earn more returns?

An emergency fund should be easily accessible, so it's not ideal to invest it in volatile assets. Instead, keep it in a liquid and safe account like a high-yield savings account or a money market fund.

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