{"id":3745,"date":"2023-03-15T10:22:47","date_gmt":"2023-03-15T10:22:47","guid":{"rendered":"https:\/\/1finance.co.in\/magazine\/?post_type=blog&p=3745"},"modified":"2025-08-02T14:15:30","modified_gmt":"2025-08-02T08:45:30","slug":"how-do-i-set-up-an-emergency-fund","status":"publish","type":"blog","link":"https:\/\/1finance.co.in\/1f-dashboard\/blog\/how-do-i-set-up-an-emergency-fund\/","title":{"rendered":"How Do I Set Up an Emergency Fund?"},"content":{"rendered":"

Dear Qualified Financial Advisor,\u00a0<\/span><\/em><\/p>\n

I\u2019ve been reading a lot about the importance of having an emergency fund \u2014\u00a0something that was made even more real by when the pandemic put the world on pause. It seems like a cornerstone of financial planning, and as a steady investor, I\u2019m keen to know how to distinguish my emergency fund from my savings and investments. Or do I not need to? I\u2019m not sure where to begin, and given market fluctuations and unforeseen circumstances, I\u2019m a bit concerned that I won\u2019t have enough if I really need it. How do I get my ducks in a row? I need some help.<\/span><\/em><\/p>\n

Yours,<\/span><\/em>
\nA Concerned Planner\u00a0<\/span><\/em><\/p>\n

Dear Concerned Planner,\u00a0<\/span><\/p>\n

You\u2019ve come to the right place, and you\u2019re already on the right track. As you know, an emergency fund is an insurance policy of sorts that helps with all types of small blips or hiccups in your daily life. An emergency fund gives you breathing space in times of job loss or medical emergencies, or when you have any unavoidable expenses that require a lumpsum amount. Imagine a friend who always opens their wallet before you reach out for yours \u2014\u00a0your emergency fund is that friend.\u00a0<\/span><\/p>\n

Having an emergency fund is advantageous in two ways: One, you need not take on any additional liability (which otherwise would have been the only option to cater to the emergency), and two, you remain en route your financial objective because none of your other savings get hampered. Still, knowing where to start is important \u2014\u00a0let\u2019s get into it.<\/span><\/p>\n

For starters, define your emergency fund. Prioritise unavoidable expenses such as equated monthly instalments (EMIs), expenses for daily necessities and children\u2019s education. Exclude luxurious expenses that can be postponed, such as hotel visits, shopping, and so on. Once you get a sense of your monthly (unavoidable) expenditure, multiply that amount by 6. That is a ballpark figure of what your emergency fund needs to be. This calculation might of course differ on a case-by-case basis depending upon factors such as the number of children you have, how many persons in your family earn, or even your spending habits. But once you have a target, you\u2019re one step closer to knowing how to achieve it, and also to understanding how close or far you are from the goal.\u00a0<\/span><\/p>\n

Achieving a six-month expenditure fund in a couple of months\u2019 time might be overambitious, so begin with small yet regular contributions, even if they are small savings like \u20b91,000\u20132,000 per month. This will inculcate a saving habit, which eventually shall become the backbone of your fund. The crux here is to sustain the saving habit until you achieve your objective. Starting with small amounts and setting up shorter milestones could be the key to successfully building an emergency fund. In addition, you can also contribute unexpected monetary benefits \u2014 such as bonuses or any extra income \u2014\u00a0to this fund so that your target can be achieved even sooner.<\/span><\/p>\n

Stick to your plan and never forget that the emergency fund is only for the sake of emergencies. This is why your emergency fund is different from your investment portfolio or savings. At many times, it\u2019s understandable to feel like you\u2019re able to sustain yourself, and in such cases, it becomes easy to forget why you have built the emergency fund. But don\u2019t use it on luxuries or to pay off some debt. With ever-changing economic scenarios, it is difficult to predict the future, and an emergency fund is always a must. On account of inflation, your monthly expenses will tend to change every year \u2014\u00a0so even if you have saved six months\u2019 worth of expenses, you will want to review and add to your fund accordingly.\u00a0<\/span><\/p>\n

The best way to create an emergency fund is to turn on an auto-debit feature on your account. This way, you save before you spend. When you begin setting aside money for your emergency fund \u2014\u00a0and since you will be saving first and spending later \u2014\u00a0you might run out of money. This is natural \u2014\u00a0you\u2019ll need to realign your expenses a bit, which may mean cutting down on unnecessary expenses, but in no way should you start swiping your credit card and incur any additional debt.\u00a0<\/span><\/p>\n

And finally, a yearly review of your emergency fund is a must for a successful emergency fund. Let us say you have built up and successfully maintained an emergency fund for the past three years, which is a commendable job in itself; you\u2019ll still want to review your fund on account of changing prices of commodities, services, earnings and standard of living. As humans, when we retain a certain way of living and tend to be comfortable only in those living conditions, we wouldn\u2019t want to lose that in case of an emergency \u2014\u00a0which is why yearly reviews become crucial.\u00a0<\/span><\/p>\n","protected":false},"excerpt":{"rendered":"

Dear Qualified Financial Advisor,\u00a0 I\u2019ve been reading a lot about the importance of having an emergency fund \u2014\u00a0something that was made even more real by when the pandemic put the world on pause. It seems like a cornerstone of financial planning, and as a steady investor, I\u2019m keen to know how to distinguish my emergency […]<\/p>\n","protected":false},"featured_media":2094,"comment_status":"closed","ping_status":"closed","template":"","meta":{"_acf_changed":false,"_updated_date":""},"blog-category":[],"acf":[],"yoast_head":"\nHow Do I Set Up an Emergency Fund?<\/title>\n<meta name=\"description\" content=\"Explore insightful articles on finance, investments, and money management on our blog. 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