Financial First-Aid: How An Emergency Fund Can Ease Financial Anxiety
An effective way to ease financial anxiety that is exacerbated by challenging times is to have a dedicated emergency reserve
Financial stress is one of the leading causes of mental health issues among people of all ages. Amidst these challenging times, when job cuts are frequent and costs of living are rising, taking care of your mental health has become even more important. On a positive note, however, a recent survey titled the ‘Aspiration Index’ highlights that more and more Indians are prioritising their mental well-being. This health goal is among the most important goal with a score of 89.9. Speaking of mental health, an effective way to ease financial anxiety that is exacerbated by challenging times is to have a dedicated emergency reserve. This safety net can alleviate the stress caused by unexpected events like a medical emergency or a job loss and allow you to think clearly during challenging times. Let’s learn more about why you should have an emergency fund, and some key tips for building one.
Why is an emergency fund important?
- Life is unpredictable and having a safety net for unforeseen events is necessary.
- Scrambling for funds in a crisis can lead you into a high-interest debt trap, which having an emergency fund can prevent.
- Having an emergency reserve can bring peace of mind and allow you to navigate life uncertainties without disrupting your financial goals.
- It minimises the impact on your savings which you may have allocated for crucial milestones like your children’s education, buying a house, or retirement.
- It can save you from making hasty financial decisions under pressure that can destabilise you financially in the long term.
How much should you save?
Just as Rome wasn’t built in a day, building an emergency fund too will take time. The goal might seem daunting, but with patience, planning and consistency, it can be achieved. Assess your routine expenses and existing debts to determine how much you will need. Experts recommend saving an amount sufficient to cover 6-9 months' worth of living expenses, such as rent, food, utilities, EMIs, and insurance premiums. Review the size of your corpus regularly to make sure it is adequate to your financial needs. To help you further, here is an illustration of the duration it would take for people with varied incomes to create an emergency fund.
| Emergency Funds & How Long Will It Take to Create It | ||||
| Monthly Take-home Income | 20% Savings | Emergency Fund Size | ||
| 3x Income | 6x Income | 9x Income | ||
| Rs.25,000 | Rs.5,000 | Rs.75,000 | Rs.150,000 | Rs.225,000 |
| Rs.35,000 | Rs.7,000 | Rs.105,000 | Rs.210,000 | Rs.315,000 |
| Rs.50,000 | Rs.10,000 | Rs.150,000 | Rs.300,000 | Rs.450,000 |
| Rs.75,000 | Rs.15,000 | Rs.225,000 | Rs.450,000 | Rs.675,000 |
| Rs.100,000 | Rs.20,000 | Rs.300,000 | Rs.600,000 | Rs.900,000 |
| Time Needed To Create Fund* | ~15 months | ~28 months | ~41 months | |
| *Using a recurring deposit returning 5.5%. Income tax as applicable. Time required will be lower with a higher interest rate and lower with a lower rate. | ||||
Tips to help you build an emergency fund
- What constitutes an ‘emergency’: Essential and inevitable expenses like critical home repairs, medical emergencies, and unforeseen travel due to a family emergency are some examples of emergencies. Define what events qualify as emergencies to save adequately for them.
- Start small and be consistent: Start with a small amount like Rs.10,000 to Rs.20,000. Fix and set aside the monthly contribution you need to make to reach this goal. Remember, consistency is key.
- Automate saving: Reduce the effort it takes to build your fund by automating the transfer to the designated emergency fund account. This will ensure you don’t skip saving each month.
- Save in a separate, accessible account/instrument: To avoid the temptation of dipping into your emergency reserve but keeping it accessible, consider creating it in a separate savings account or investing in liquid funds.
- Review and adjust regularly: As life goes on, situations change, and so do needs. Review your needs from time and adjust your fund to ensure you are always prepared.
Life is full of ups and downs, and an emergency fund can provide the necessary cushion to shield your finances while also giving you peace of mind. While setting it up can take time, the benefits it offers to your financial and mental well-being make it worthwhile.
The writer is Sr. Manager, Communications, BankBazaar.com. This article has been published as part of a special arrangement with BankBazaar.
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