Nov 2022
6 mins read

7 Mistakes to Avoid When Building Your Emergency Fund

An emergency fund can help you overcome some of the toughest situations in life. Whether it’s an unexpected layoff, a medical emergency or business disruption due to economic recession, you may need emergency funds to tide you over a crisis. During the coronavirus pandemic, 40% of people1 dipped into their emergency fund, and nearly three-quarters of them ended up spending more than half of it. When you have an emergency corpus for these situations, you are ready for anything life throws at you. The stakes are high, so it’s vital that you go about it the right way – and these are the 7 common mistakes you must avoid when building your corpus:

Not knowing how much to save

A common rule of thumb is that you should put aside at least 3-6 months’ worth of income in an emergency fund, but experts recommend saving as much as 6-12 months’ worth of your salary. Your decision should ultimately be based on your spending habits, monthly budget and specific lifestyle needs. Take time for careful budgeting to ascertain your exact requirement and arrive at a target corpus value.
point 1

Not saving enough

Building an emergency fund requires focus and discipline. Once you have allocated a value to your emergency fund goal, you must consistently save enough to achieve that value, in order to ensure you’ll have funds at your disposal when you need them the most. 

point 2

Not keeping your emergency fund liquid

Emergency savings need to be easily accessible, because you never know how urgently you’ll need them! Keep your money in avenues that offer instant liquidity, such as liquid mutual funds, which are instantly redeemable and also allow returns on your investment.

point 3

Investing in high-risk assets

Assets such as equity , real estate and cryptocurrency2 may promise high returns, but they are prone to volatility. Your emergency fund should be secured so that market volatility does not eat into its value. Try and avoid high-risk avenues and invest in safer options to keep your capital intact.  

point 4

Using it for non-emergency spends

An emergency fund is meant to be used in one case only – emergencies. It may be tempting to dip into your fund when you need money in other situations, but you must be firm. You never know when an emergency will strike, and it’s imperative to be ready at all times, so don’t touch your emergency funds in non-emergency situations. If you have to do it, make sure you replenish it immediately, so that when an emergency strikes, you have the money you need. 

point 5

Never revisiting it

Once you have built an emergency fund for yourself, you must keep updating it according to your circumstances. Your lifestyle and requirements will change with the passage of time, so try and re-evaluate your emergency fund at regular intervals, and increase it to match your changing needs.

point 6

Never rebuilding it after using it

This is a common oversight. If your emergency fund has been used – either partially or fully – then it must be rebuilt as soon as your situation stabilises. The moment your income and expenses return to normal, resume monthly contributions to your emergency fund.

point 7

An emergency fund is money put aside with the hope of never having to use it. But you must build it adequately while you can, so that you’re always ready for the worst. You can explore several liquid and low-risk options to keep your money secure and accessible. Ultimately, an emergency fund is essential for true financial independence – so start planning today.

1. https://www.forbes.com/advisor/personal-finance/emergency-fund-survey/
2. https://www.investopedia.com/articles/investing/052014/why-bitcoins-value-so-volatile.asp#
3. https://www.investopedia.com/financial-edge/0712/the-8-most-volatile-sectors.aspx

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