Simplifying Life Insurance in India
What is the Best Timeline for Building an Emergency Fund?
Time Needed to Plan for an Emergency Fund
This is a crucial question for anyone planning to build an emergency fund. Ideally, it should take between 6 and 18 months to complete this process. However, the time requirements for building a contingency fund depend on many factors, like your lifestyle expenses, amount of savings, and how strictly you adhere to your budget.
Once you determine the time needed to build your emergency fund, you can start accordingly. You can also adjust the monthly savings to keep aside if you have a limited duration. You can follow expert tips to save more from your earnings in such cases.
Different Ways to Speed Up Your Emergency Fund Savings
Worried about how to save enough for your contingency fund every month? Here are some sure-shot ways that can help you kick-start your savings journey.
Cut Down on Unnecessary Expenses: Identifying unnecessary expenses when you are on a spending spree can be difficult. So, start tracking your daily expenses immediately and evaluate them at the end of the month. This will help you identify and eliminate needless expenses from your expenditure list.
Strictly Adhere to Your Budget: Framing a budget is not sacrosanct but helps you to plan your monthly expenses efficiently. However, you can write it down in a separate sheet to make it more impactful. This will act as a constant reminder and motivate you to follow your budget religiously.
Shift Your Emergency Fund to a Different Account: To ensure you do not use up the contingency fund money, put it in a different account. You can choose any high-yielding accounts for maximum returns. This can be a potential way of increasing your contingency fund savings.
Start a Side Hustle to Increase Your Income: More income ensures increased savings. To amplify your income, you can look for a side hobby that you can earn from. Initially, it may get complicated. However, you can earn adequately from this side gig once you start.
Sell Your Unused Stuff to Make More Money: You buy several items that you think might be useful. However, later you realise they are of no use, and they keep accumulating. You can sell that unused stuff to potential customers on various platforms to get back some percentage of your investment.
The amount of emergency savings needed varies notably with individuals due to the difference in income, lifestyle and expenditure pattern. Once you maximise your savings, you can easily calculate the timeline required for building the required amount in your contingency fund.
Calculation of Emergency Fund and Timeline
Emergency savings calculation is simple. You can follow some simple steps to determine the contingency fund savings and accordingly build a timeline.
Step 1: Determination of Total Income: The primary step of contingency savings calculations is adding up all your income from different sources. This can include different sources like rents, gifts, jobs, investment returns, etc.
Step 2: Calculating Your Monthly Expenses: Next, you can determine the monthly expenses on the essential and semi-essential items. This usually includes payment of electricity bills, food, rent, costs of travelling to your workplace, clothing and so on.
Step 3: Multiplying the Result by Six: After adding all the expenses, multiply the result by six. This will allow you to estimate the total money you will need to sustain without a regular inflow of cash. Accordingly, you can determine the timeline for building a contingency fund.
Step 4: Inclusion of Other Anticipated Expenses: You can also add up some anticipated one-time expenses while determining the total expenditure. This includes medical and vehicle repair expenses, electrical gadgets repair costs, insurance premiums, loan EMIs, etc.
Step 5: Determination of Monthly Savings: You can subtract the monthly expenses from your total income to determine the monthly savings. Apart from this, you also need to subtract the amount from the savings you plan to put in other accounts, like a rainy day fund.
Step 6: Deciding the Timeline for an Emergency Fund: Finally, you can divide the total contingency savings required by the amount you can contribute to this fund without making major lifestyle changes. This will give you an idea of how much you can contribute to your emergency account savings.
Here is an example of the calculation that will give you an idea regarding the timeline you would need to build an emergency fund and how many months of income an emergency fund should cover.
Let’s assume that your monthly income is ₹1 Lakh. There can be numerous expenses that you can have in a month. Some of the unavoidable ones include:
|
Expense Type |
Expense Amount in ₹ |
|
Food |
10,000 |
|
Travelling |
5,000 |
|
Clothing |
5,000 |
|
Rent |
10,000 |
|
Utility bills |
10,000 |
|
Total Amount |
40,000 |
Apart from this, there are several other expenses that you might not need to pay monthly but are big-ticket and need to pay at regular intervals. These usually include:
| Expense Type | Expense Amount in ₹ |
| Vehicle repair costs | 10,000 |
| Minor medical expenses | 10,000 |
| Insurance Premiums | 10,000 |
| EMIs | 10,000 |
| Travelling | 20,000 |
| Total Amount | 60,000 |
According to the above tables, the total requirement of the funds in your contingency account can be determined as follows:
|
Expenses |
Formula |
Amount in ₹ |
|
Monthly Expenses |
40,000 X 6 |
2,40,000 |
|
One-time expenses |
60,000 X 1 |
60,000 |
|
Total expenses |
Monthly Expenses + One-time expenses |
3,00,000 |
From the above values, you can quickly determine your monthly savings. From there, you can easily determine the time required to build them.
|
Expenses |
Formula |
Amount in ₹ |
|
Monthly savings (A) |
1,00,000 – 40,000 |
60,000 |
|
Other savings account contribution (B) |
10,000 X 1 |
10,000 |
|
Emergency Fund contribution |
A – B |
50,000 |
Hence, the time required to build an emergency fund is = 3,00,000/50,000 = 6 months.
We hope this article answers your query about how many months you need to build an emergency fund. You should also note that it is imperative to secure your contributions while building the contingency fund. This will ensure an instant supply of sufficient money when facing a financial crisis.
FAQs about Timeline for Building Emergency Fund
How to secure contingency fund savings?
Where can you park your emergency fund money?
How can you use your emergency fund money?
What are the advantages of building an emergency fund?
Which factors can help you decide the amount you should keep in your emergency fund?
Other Important Articles Related to Emergency Fund
Important Articles About Financial Planing
Disclaimer
- This is an informative article provided on 'as is' basis for awareness purpose only and not intended as a professional advice. The content of the article is derived from various open sources across the Internet. Digit Life Insurance is not promoting or recommending any aspect in the article or its correctness. Please verify the information and your requirement before taking any decisions.
- All the figures reflected in the article are for illustrative purposes. The premium for Coverage that one buys depends on various factors including customer requirements, eligibility, age, demography, insurance provider, product, coverage amount, term and other factors
- Tax Benefits, if applicable depend on the Tax Regime opted by the individual and the applicable tax provision. Please consult your Tax consultant before making any decision.
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