Emergency Fund: What to do in case of sudden job loss or illness? Learn why an Emergency Fund is essential for financial security

Emergency Fund: Imagine this situation – You wake up one morning to an email from your employer announcing sudden layoffs. Or maybe your vehicle breaks down on the way to work, and the repair cost is more than half your salary. Life’s unexpected expenses can come without warning, and in those moments, financial stability can vanish in an instant.

This is where the concept of an emergency fund steps in, your personal cushion against life’s unpredictable blows. It doesn’t promise returns like an investment but offers something far more valuable: peace of mind. On that note, let’s learn more about it.

What is an Emergency Fund?

An emergency fund is a financial safety net that helps you manage unexpected expenses without borrowing money or falling into debt. Think of it as your personal rescue fund, money kept aside specifically for emergencies, not for vacations or impulsive shopping.

The purpose of this fund is simple: to ensure you have immediate access to money when life throws you an unpleasant surprise, be it a medical emergency, sudden job loss, home repair, or any urgent expense that cannot be postponed.

Why is an Emergency Fund important?

1. Protects you from debt:
When unexpected costs arise, people often turn to credit cards or personal loans. While that might seem convenient, it can trap you in a cycle of interest payments. An emergency fund lets you face such situations without borrowing.

2. Brings peace of mind:
Knowing you have money tucked away for tough times reduces financial anxiety. You can focus on solving the problem instead of worrying about how to pay for it.

3. Helps you stay independent:
Financial emergencies can sometimes push people to borrow from friends or family. With your own funds, you don’t have to rely on others or feel embarrassed during difficult times.

4. Keeps long-term goals safe:
Without an emergency fund, you might be forced to dip into your savings meant for bigger goals, like education, a car, or your future home. Having a dedicated backup prevents that.

How much should you save in your emergency fund?

There is no exact rule, but experts usually suggest saving enough to cover 3 to 6 months of basic living expenses.

Here’s how you can estimate it:

• Calculate monthly essentials: Add up your rent, groceries, transportation, utility bills, EMIs, and basic medical costs.
• Multiply by 3 to 6: If your monthly expenses total ₹30,000, you should ideally aim for ₹90,000 to ₹1.8 lakh as your emergency fund.
• Start small, stay consistent: You don’t need to save it all at once. Start with a small target, maybe ₹10,000, and build it gradually by setting aside a fixed amount every month. Even ₹500 or ₹1,000 monthly can make a difference over time.
• Keep it accessible but separate: Store your emergency money in a place that’s easy to withdraw from but separate from your regular spending account, such as a separate savings account. The key is liquidity, not profit.

Disclaimer: This article is for informational purposes only. Please consult with a financial advisor before making any investment decisions.