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What Are Emergency Funds? Know its meaning, how to build & when to use

Updated on: 14 Mar 2024

Having an answer to the question, “What are emergency funds?”, is important for anyone looking to plan their finances effectively. Simply put, these are a source of funds that you dip into during emergencies and unexpected situations. Irrespective of how well you budget and save, these situations can cause financial instability.

So, building such cash reserves and knowing when to use them is necessary. While it may sound simple, building your emergency fund reserves involves more than merely depositing a fixed sum of money in your savings account. You must carefully strategise to ensure that your savings do not get eroded due to inflation.

Read on for helpful insights and tips.

What is an Emergency Fund?

Simply put, this is a savings cushion that you set aside for unexpected financial situations. You use these funds strictly when dealing with a crisis and not for regular expenditures. This way, you can avoid debt traps or stress about arranging funds during tough times.

There isn’t a standardised amount for an emergency fund, but there are a few strategies that can help. For one, financial experts suggest that you should put aside at least an amount that can cover 6 months’ worth of expenses. So, you must customise it after analysing all vital factors, such as your monthly income, expenses and debt obligations.

Here are some key facts you must know when planning to build an emergency fund.

Set the right target amount and monthly contribution amount
Find an instrument that is liquid and stable to invest in
Build separate funds for long-term and short-term crises
Do not use these funds for impulse purchases

Also Read: Need ₹1 Lacs Emergency Loan Urgently?

When to Use Your Emergency Fund?

Here are a few situations that you can handle with your rainy-day fund.

Income Reduction or Job Loss

In instances where you are no longer employed or your income decreases, having an emergency fund will come in handy. Be it to cover your bills or pay for day-to-day expenses, it relieves the pressure. It allows you to focus on recovering without worrying about money for a few months.

Medical Emergency

Medical emergencies such as accidents, critical illness diagnoses and treatments, etc., can be very expensive. So, you must have a financial backup plan to manage your bills. In addition to this fund, make sure to invest in insurance as well.

Urgent Home Repairs

Damages to your home or certain appliances can occur at any time and you may not always have the savings to deal with it. While you can take on debt, this isn’t an option for everyone. This is where an emergency fund can help, as you can address immediate issues with the home, without disrupting your budget.

Post-accident Car Repairs

Car accidents are quite common and repairing damages due to a collision or a breakdown is expensive. You can rely on your emergency funds in case of car damage due to an accident or other reasons.

Unexpected Travel

You can also use your emergency fund to cover immediate yet necessary travel expenses. However, you must not use it for vacation, as it isn’t a crisis.

How to Build an Emergency Fund

Follow these steps to create an effective emergency fund.

Step 1: Calculate your net income and expenses
Step 2: Plan your fund amount
Step 3: Create a monthly savings goal
Step 4: Choose the right investment option
Step 5: Automate your contributions
Step 6: Use the allocated funds only during times of crisis and continue contributions for as long as needed

In addition, you must monitor your funds regularly and adjust your goals based on your lifestyle changes. This way, you can ensure that your funds are secure and sufficient. In instances where you need urgent financing and you are still working on your emergency fund, opt for a Fibe Instant Personal Loan. With a loan of up to ₹5 lakhs, you can handle any urgent expenses that come up.

This loan comes with affordable interest rates and a flexible repayment plan, ensuring it fits your budget. Moreover, you can apply with minimum documents from the comfort of your home and even pre-close the loan without any additional charges. Download our Personal Loan App or go to our website to apply now.