Worried about your financial health? 5 steps to build an emergency fund in 12 months

Several surveys over the years have consistently shown that a significant portion of Indians don’t have an emergency fund. This lack of financial knowledge and contingency funds has resulted in most remaining vulnerable to financial difficulties such as medical emergencies, sudden layoffs and unexpected expenses.

One such survey, conducted recently by Finology Ventures, found that 75 per cent of Indians lack proper planning and emergency funds, exposing them to financial challenges and debt in later life.

Warren Buffett has correctly underscored the importance of savings. “Do not save what is left after spending, but spend what is left after saving,” the billionaire investor stated. This again establishes the importance of emergency funds, planning and long-term target setting.

Now, amid this complex situation arising from the lack of financial planning, savings and emergency funds, there is also the massive problem of financial illiteracy in the country. The absence of proper financial education puts many people vulnerable to erratic expenses, inflation and bankruptcy. These issues have forced many to rely on debt, compromise on life essentials and deplete long-term savings during challenging times.

Create a safety net

To combat such avoidable situations, it is important to build an emergency fund. Such a fund can provide much-needed financial security in today’s uncertain economic climate. Here’s how you can create a safety net in just 12 months:

Step 1: Understanding your monthly expenses

You should start by reading into and understanding your monthly expenses, including but not limited to rent, utilities, groceries, electricity bills, pending personal loan and credit card EMIs, among other related expenses. It is extremely important to cover at least three to six months of your monthly expenses in a planned way. This will help you set realistic savings targets.

Step 2: Create a devoted savings account

To avoid mixing money with regular expenses, you can open a savings account. This will help you keep your emergency fund separate. Banks such as HDFC Bank, Ujjivan Small Finance Bank, and Kotak Bank offer specialised savings accounts for this purpose. Now automating deposits into this account can make savings seamless. Suze Orman, an American financial advisor, has perfectly summed up the importance of creating emergency funds: “An emergency fund is not a luxury; it’s a necessity. It’s your financial seatbelt in an unpredictable world.”

Step 3: Cut non-essential spending

It has been seen that Indians spend excessively on salary day, leaving limited room for savings. To counter this, plan and prioritise essential spending and reduce discretionary expenses like dining out or luxury purchases such as expensive watches or clothes. Redirect these savings into your emergency fund. This will help you prepare for facing any upcoming challenges.

Step 4: Increase income streams

Supplement your primary income with freelancing, allied business work or side gigs. Even small additional earnings can significantly accelerate your savings goal over time. Millennials and Gen Z, who often prioritise lifestyle over savings, can benefit greatly from this approach. That is why proper education in this regard is imperative.

Step 5: Monitor your progress monthly

Regularly review and check your savings progress and adjust contributions if needed. Tracking helps maintain focus and ensures you stay on course to achieve your target within the stipulated timeframe. At the same time, it is also important to continuously read and build knowledge about keeping your finances balanced.

Why do emergency funds matter?

With mass layoffs affecting lakhs of employees globally in the last two years, including many Indians, financial preparedness has never been more critical. An emergency fund acts as a buffer during unforeseen events, providing peace of mind and preventing debt traps.

Also Read: Why did your credit score drop unexpectedly? Here’s how to recover fast

Hence, if you plan carefully and follow the above-given steps for 12 months on a consistent basis, then you can easily create a comprehensive emergency fund. This can also save you from forced loans, credit cards and eventual repayment through high interest rates. Further, if in doubt, always consider reaching out to a SEBI-registered investment adviser and make informed saving and investment decisions.

Disclaimer: This article is for informational purposes only and should not be considered financial advice; please consult a financial advisor for personalised guidance.