The Finance Nest

You have been working for 10-15 years. You are married, maybe have one or two kids, and are living in a rented house or paying EMI for your home loan. Your work life is great, which pays you well. But every month you feel like you’re in a tight spot—EMIs, groceries, school fees, trips, fuel, medical expenses…it keeps adding on.

Now, God forbid, if your company shuts down or there is a medical emergency or there is major home or car repair work that you had not planned for. That’s when the reality hits you and you realise- while earning money you were not financially secure; you were just surviving.

So what does financial security mean?

Financial uncertainty and unplanned expenses are unavoidable. The best way to deal with it is to plan for it beforehand. This is when keeping an emergency fund handy can give you a sense of security to fight the situation. Keeping aside some savings from your monthly income, beginning today, helps you be prepared for such. This feeling of security ensures you don’t make bad financial decisions during emergencies and brings you peace of mind. 

How much of an emergency fund is enough?

Short answer: If you are good with savings, save 6 months worth of salary.

Long answer: If saving isn’t easy for you, sit with a pen and paper and list all monthly expenses in two categories:

Fixed Expenses: Which are fixed and unavoidable, like EMIs, tuition fees, electricity, groceries, etc.

Flexible Expenses: Expenses that are not fixed and can be managed, like dining out, subscriptions, and movies.

Calculate the total monthly expenses and multiply it by 6. That’s your emergency fund goal—enough to cover 6 months of living expenses.

How to build an emergency fund:

Set a Goal: Set a savings target to meet at least 6 months of expenses; for better security, you can plan for 9 months or 12 months. First, save for unavoidable expenses like EMIs, school fees, etc. Once it’s done, start saving for all other day-to-day expenses.

Focus on liquidity, not on growth:

Your emergency fund should be easily available, not locked in a long-term growth plan. Bank fixed deposits or recurring deposits are ideal. Market-linked plans like MFs can give you good growth, but they are not easily available and can be risky.

Make a system for consistent contribution:

Emergency funds grow over time, not instantly. So plan a recurring saving. Set aside some funds from your monthly income and be punctual with it. Also keep track of these savings. While saving, draw a line between emergency funds and other savings to meet your targets.

Save before you spend:

This is the golden rule most people ignore. Save before you spend. Believe me, if you save first, you’ll always be able to manage your expenses. But if you spend first, you’ll rarely have anything left to save. This is how you build consistency.

Now, when it’s clear why and how to have an emergency saving, make sure you start saving from today itself. In finance, timing is more important than time. Once your emergency fund is ready, don’t dip into it for anything other than emergencies. It’s tempting, but avoid it.

Stay disciplined. Stay prepared. Happy saving. Happy investing

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