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Stop Ignoring that Emergency Fund You Always Wanted to Build

  12/20/23 11:54 AM

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Life is unpredictable, and emergency situations can pop up without any warning. Just look at what happened during the COVID-19 pandemic. Such unexpected events can completely drain your savings if you are not careful. Financial security should always be one of your top priorities. Every person needs to invest in emergency funds that they can rely on during trying times. Basis your risk appetite, you should invest a plan that can help you develop your emergency fund. Here are the basics and benefits of having an emergency fund:

What is an Emergency Fund?

An emergency fund is basically the money you set aside to deal with emergencies. It is a fund which you can fall back on if something unpredictable happens, like loss of job, major home repairs, or health issues. It is also a safer alternative to taking unsecured loans or using up your lifesavings meant for your retirement.

How much do I save in an Emergency Fund?

There’s no one-size-fits-all answer to how much you should have in an emergency fund. The amount you need in an emergency fund varies from person-to-person and depends on things like your age, job, liabilities, when you plan to retire, your lifestyle, and your tolerance for risk. The thumb rule is that you to set aside three to six months’ worth of living expenses in an emergency fund.

How do I build an Emergency Fund?

There are two approaches – First approach is to start small. You cannot build an emergency fund overnight. You must have the discipline to set aside a particular amount every month and not use it for planned purchases.  The other approach is to build up a bare minimum emergency fund. You can then funnel your monthly savings and set aside smaller amounts to further add to this fund. The second approach is usually preferable if you are supporting a family or already have to deal with unpredictable expenditures.

How Can Life Insurance Help You Build Emergency Funds?

Life insurance plans have evolved over the years to provide you with safety both in life and death. For example, guaranteed income plans are life insurance policies that offer a savings element for your long-term goals. Moreover, many guaranteed income plans also allow you to take out loans on your policy, which allows you to get quick access to liquid cash during emergencies. Edelweiss Tokio Life- Income Builder is an affordable guaranteed income plan that can help you grow your savings.

Unit Linked Insurance Plans (ULIPs) are another source of emergency income. These plans combine insurance with an element of investment. A part of your premiums is invested into various market-linked funds chosen by you. Once your ULIP policy is over five years old (past the lock-in period), you are free to withdraw money from your invested funds at any time. The withdrawal limit varies from policy to policy, but it is undoubtedly a great source of income during a financial crisis. Edelweiss Tokio Life- Wealth Rise+ is a ULIP with a bouquet of 7 funds to choose from.   

Is Savings an Emergency Fund?

The answer is – NO. Savings are what you put aside, to accomplish certain goals, like vacation, education, house, retirement, etc. Emergency funds, on the other hand, are meant for financial security during turbulent times.

In a nutshell, emergency funds help you prepare for emergencies and the uncertainties of tomorrow. So, start building your emergency fund and funnel as much as you can each month to avoid financial hardships in the future!

 

Neha Panchal - Financial Content Writer

Neha used to be an Engineer by Profession and Writer by passion, which is until she started pursuing full-time writing. She's presently working as a Financial Content Writer, with a keen interest in all things related to the Insurance Sector.

 

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