An emergency fund is money set aside for unexpected costs such as a medical bill, a job loss or an urgent repair. Having one means you do not have to borrow when something goes wrong.
How much should you save?
A common guideline is three to six months of essential expenses: rent or EMI, food, bills, insurance and transport. If your income is irregular, aim closer to six months.
Step 1: Work out your monthly essentials
Add up only what you must pay each month. This is your base number.
Step 2: Set a starting goal
Do not try to save six months at once. Start with one month of expenses, then build up.
Step 3: Automate the saving
Set a standing instruction so money moves to a separate account on salary day. Saving what is left over rarely works.
Step 4: Keep it safe and accessible
Use a savings account, a sweep-in fixed deposit or a liquid fund, depending on your comfort. The priority is easy access, not high returns.
Step 5: Use it only for real emergencies
A sale or a holiday is not an emergency. If you do use the fund, rebuild it as soon as you can.
This article is for general information and is not personal financial advice.
Photo credit: Reserve Bank of India / AKS.9955, CC BY-SA 4.0, via Wikimedia Commons.
