Why you need an emergency fund: Your financial safety net for life's uncertainties

Mumbai (The Uttam Hindu): In today's world, when jobs, businesses, and income can be affected at any time, an emergency fund has become a crucial part of everyone's financial life. It's a fund that protects you from having to take out loans or break investments in the face of unexpected financial difficulties.

An emergency fund is a sum of money set aside specifically for emergencies, such as a sudden job loss, a medical emergency, a major family expense, or a business loss. This money is not for your everyday expenses or investments, but is only for times of crisis.

Experts say that uncertainties can arise at any time. If you don't have an emergency fund, you may have to resort to credit cards, personal loans, or even help from friends and relatives. This not only worsens your financial situation but also increases mental stress. An emergency fund, on the other hand, makes you self-reliant and gives you the assurance that you have readily available funds during difficult times.

Medical expenses are rising rapidly these days. Despite health insurance, expenses often have to be incurred out of pocket. Similarly, job loss for employed individuals and loss of income for freelancers or business owners can be a significant challenge. In these situations, an emergency fund becomes your first line of defense.

Financial experts say that building an emergency fund isn't difficult; it just requires discipline. First, make a list of your monthly essential expenses, such as rent, groceries, electricity, school fees, and EMIs. Then, decide to set aside a portion of your income each month, even if it's small. If you wish, you can transfer this amount to a separate account as soon as you receive your salary. Start with a small amount and gradually increase it.

According to experts, an emergency fund should be located in a place where money can be withdrawn quickly and is risk-free. Savings accounts, liquid mutual funds, or short-term fixed deposits are good options. The stock market or long-term investments are not suitable for this purpose.

Financial experts generally recommend that your emergency fund should cover at least six months of essential expenses. If your job or income is unstable, this amount can be as high as nine to twelve months of expenses.