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Why Should You Build an Emergency Fund?

Emergencies are an unavoidable and unanticipated aspect of our life. We need have access to a suitable financial support system, otherwise known as an emergency fund. Read ahead to know why they are important.

  • Jan 23, 2023

If you have difficulty paying your bills or cannot cover unforeseen costs, you can benefit from investing in emergency fund. Experts recommend possessing at least three to six months of liquid assets. Your emergency reserve protects you from falling into debt in the case of an unforeseen financial setback. ​

It also gives you peace of mind if you lose your job, or got too unwell to work, or need to pay for an expensive automobile or house repair. There are several reasons to increase your emergency fund balance.

    Key Takeaways

    The primary reasons to invest in Emergency Fund are.

    1.Future financial goals

    2. Medical emergencies

    3. Job lay-off

    4. Paying for debt and loans

What is an Emergency Fund?

An finance emergency fund is your savings for unanticipated but financially significant expenses. It’s like a safety net that protects you in case something unplanned and uncalled for happens. This is not a savings account but an emergency fund for situations of extreme need. Emergencies are not limited to medical situations but encompass various critical circumstances.

A finance emergency is any unplanned event requiring a large, unexpected financial outlay beyond what was planned for in the usual events. Major auto repairs, an unpredicted work shift, or unemployment all fit under this category. It’s crucial to set aside money for these and many other unforeseen expenses.

5. Key Reasons to Build an emergency fund

Saving to Meet a Financial Goal

Your emergency fund can ensure you don’t have to take money out of your savings for long-term financial goals., like buying a house or establishing a company. Because of this, you won’t have to worry about falling behind schedule. Putting money aside for an emergency fund may slow you down temporarily, but it’s well spent.

This is a fantastic method of keeping your money safe. Setting money up for emergencies is a smart way to ensure you can meet your long-term financial objectives. The money set aside to build an emergency fund should be viewed as protection against unforeseen costs.

Saving for Medical Emergency

A severe medical condition can cause your annual deductible to be exhausted. You might also need to spend all your sick time and take unpaid days off due to regular testing or illness. A well-funded emergency fund can assist with these expenses and make it easier to endure these difficult times.

Medical difficulties can be costly, and insurance companies., may not cover everything you anticipate. Additionally, you may miss work and exhaust your sick pay, which might lead to more serious problems. But, again, your emergency fund can assist with this.

Allocating Resources to Pay Off a Debt

Your emergency fund might assist you in stopping adding to your debt if you have a financial setback. An emergency fund can meet unforeseen expenses, such as auto repairs or medical bills.

Utilise your emergency fund to manage these stressful situations and make it simpler to remain focused on paying off your debt. When you have a cushion for unanticipated costs, it is simpler to immediately pay more on the debt. Include an emergency payment until it is completely covered in your budget.

Single Source of Income

If you have only one source of income, you must maintain a sizable emergency reserve. This can help you survive a job loss or sickness that prevents the primary earner from working. If you are a one-income household or single, your emergency fund should contain at least one year’s worth of costs. After paying off your debt, you may construct a greater emergency fund. Those just beginning a family may need to improve their emergency savings. If you are unmarried, you should establish an emergency fund as soon as feasible.

Job Lay-off

Having an emergency fund set up helps you meet your financial obligations if you unexpectedly terminate your work or decide to leave your current position. In a similar vein, the fund will assist you in meeting necessary expenditures if you go through dry spells in which you do not receive a consistent monthly income.

How to Build an Emergency Fund?

Mentioned below are the five crucial tips to keep in mind when you plan to build an Emergency Fund.

1. Finalise a date to set-up your fund

2. Take account of the existing assets

3. Create a monthly plan

4. Create a separate account for your emergency fund accumulation

5. Put aside lump sum inflows


Knowing you have sufficient funds to meet a catastrophe might make you feel more rested. Although you cannot forecast when an unplanned expenditure or other problem may strike your budget, you can prepare to recover by putting aside cash for unanticipated expenses or a loss of income. In addition to strengthening your financial resilience, you should watch your credit.

In this policy, the investment risk in the investment portfolio is borne by the policyholder.

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Ref. No. KLI/22-23/E-BB/521


- A Consumer Education Initiative series by Kotak Life

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