Top ways to build your Emergency fund for future emergency | How you can build and emergency fund and where you can save this fund to invest

Life will surely throw you unexpected curveballs like a medical bill or a big car repair, which is why building an emergency fund is your financial safety net to cover any unanticipated expenses so you don’t have to fall into debt. You can get started by setting a large goal (for example, ₹50,000 or 3-6 months of your expenses) and begin to steadily fill that fund with some simple, automatic habits, like saving all your windfalls (like bonuses or tax refunds), reducing a few things each month that you don’t need or that are non-essential (you can also start a small side hustle!). You will want to put this money in the safest place possible, your everyday checking or spending account frankly isn’t safe, nor would it even be in a risky stock. Instead, protect the value of your cash by keeping it ideally in a well-segregated and high, liquid, but safe account. Not allowing quick accessibility can greatly contribute to your financial well-being. Some ideal products to explore: A savings account dedicated to an emergency fund, a liquid mutual fund, or a fixed deposit with penalties allowing for easy access. You’ll want your cash to be safe from impulse spending but available when there is a legitimate need due to an emergency.

Top ways to build your Emergency fund for future emergency

Cut Non-Essentials:

Eliminating non-essentials is simply cutting down on daily discretionary spending. Non-essentials are things that you want but don’t need, and reallocating that money into savings. You can start by identifying the small leaks in your budget. For example, you may have subscriptions for services that you rarely use or make awkward choices while shopping that lead to impulse buys. Unplug those leaks. While the savings may seem insignificant on their own, they will add up and can build over time to create a cushion in your personal finances.

50/30/20 Rule:

The 50/30/20 rule presents a straightforward approach for budgeting by splitting your take home pay into three categories: 50% for essentials, such as groceries and rent, 30% for wants, such as restaurants and hobbies and 20% for savings and debt repayment. This rule emphasizes savings to build a parachute while helping you to enjoy your life.

Automate Transfers:

Automating your transfers is a way of building an emergency fund that allows you to “Set It and Forget It.” Set up auto transfers from your checking account to your savings account the day after payday, and this approach requires little effort and will make saving much more consistent. It places your future security at the forefront, does not rely on your willpower, and continually adds to your financial safety net.

Sell Unused Stuff:

You can quickly raise your emergency fund by selling items you no longer use or need, turning clutter to cash. Gather anything around your home or garage that you do not use and sell it online or at a garage sale or local store. The money is profit that goes straight into your emergency fund and serves the dual purpose of simplifying your home and allowing you to build financial security for your family.

Start Small and Build Gradually:

If saving lots of money feels overwhelming, begin small, with $20-50 each week or month, whatever you feel capable of spending. When your budget allows, gradually increase your savings. Or if you find a little extra money (like tax returns, bonuses, etc.), add to the emergency fund from that.

Reevaluate and Adjust Regularly:

Periodically review your goals and expenses. As life changes (e.g., salary increase or new costs), adjust your contributions to stay on track.

Where to Save Your Emergency Fund

Emergency funds should be kept in safe, accessible places that offer some interest without risking principal. Avoid high-risk investments like stocks, as the goal is liquidity and preservation.

Standard Savings Account (Bank/Credit Union):

A traditional savings account is a secure location to store your money and earn interest on an ongoing basis. It’s similar to a digital safe where your money can grow over a period of time. It’s a good account to use for saving towards goals you want to achieve, e.g., vacation funding or an emergency fund, and separate savings from cash used for daily spending. Your funds are safe and grow in interest, though you generally can’t use the account for paying bills and there may also be limits on withdrawals.

• Pros: Very safe, easy to open, linked to checking for quick transfers.
• Cons: Lower interest rates.
• Typical APY: 0.01-0.50%
• Best For: Beginners or those prioritizing simplicity over yield.

High-Yield Savings Account:

A high-yield savings account is essentially a savings account that earns a higher interest rate than a traditional savings account, enabling your money to grow more quickly. Online banks frequently offer high-yield accounts, which could be preferable for customers because it allows them to keep their operating overheads low. A high-yield savings account is a relatively low risk option for short-term goals, such as saving for an emergency fund or for a big purchase, while also giving you easy access to cash when you want to utilize it.

• Pros: High interest, easy access, FDIC-insured up to $250,000, no fees with many providers like Capital One or Amex.
• Cons: Rates can fluctuate.
• Typical APY: 4.00-5.00%
• Best For: Most people seeking growth with liquidity.

Short-Term Treasury Bills or CDs:

Both Treasury Bills and CDs are considered short-term investments where you lend money to either the government or to a bank for a specified time period (for example, anywhere from a couple of months to a year). In exchange, you receive back your principal, plus interest, on a pre-determined future date. Your funds are safe and secure, earning interest; however, they are somewhat “locked in” during this time. Your principal is safe, so this can be considered a very low-risk option for short-term savings.

• Pros: Government-backed, fixed rates, low risk.
• Cons: Less liquid (penalties for early withdrawal on CDs), may need to roll over T-bills.
• Typical APY: 3.50-4.50%
• Best For: Conservative savers okay with slight illiquidity for stability.

Money Market Account:

A money market account is a variety of savings or deposit account which accumulates interest and allows convenient access to cash with a debit card or check writing. A combination of savings account growth and checking account privileges, a money market account may require a higher minimum balance and/or charge a monthly fee if not maintained properly. Money market accounts are often suitable for emergency funds or for short-term savings.

• Pros: Competitive rates, check-writing privileges, FDIC-insured.
• Cons: May require minimum balance, limited transactions.
• Typical APY: 4.00-4.50%
• Best For: Those wanting slight flexibility for occasional withdrawals.

Conclusion

Establishing an emergency fund is a wise step in preparing for unforeseen expenses you may face such as medical payments or loss of income. Start by setting a clear savings goal, cutting wasted expenses, and schedule regular deposits or transfers that deposit back to the separate account. If or when you receive additional income from a side hustle, freelance work, or a windfall, add some amount of money to your fund. You may also want to consider storing this money in an account such as a high-yield savings account or money market account so you can earn a bit of interest, while also having the money easily accessible for life’s unexpected expenses. Over time, with consistent effort and discipline, you’ll have a meaningful financial safety net to provide you with comfort and peace of mind.