Building an emergency fund: A complete guide

What is an emergency fund?

An emergency fund is a savings account used to cover unanticipated expenses. So, let’s discuss on building an emergency fund. It’s an excellent idea to have one because you never know when you’ll need money for things like:

  • A vehicle repair.
  • Medical expenses (including prescriptions)
  • Having an emergency fund will help you pay for repairs or maintenance on your house, like fixing the roof after a storm, without having to pay more in the future.
emergency fund

Why is an emergency fund necessary?

Building an emergency fund in a savings account is used to cover unanticipated expenses. A fund for emergencies is important because it makes sure you’ll have money if something unexpected happens, like:

  • A car repair that is more expensive than predicted
  • A medical expense for which you are not insured and must pay out of pocket (e.g., if your child needs stitches)
  • unexpected appliance failure, resulting in a significant increase in your utility expenditures.

Starting an Emergency Fund

To begin, you’ll need to create a budget. It’s as simple as writing down how much money you spend on groceries each month and dividing it by four. Then multiply this figure by 12 (the number of months in a year). The end result is your annual grocery budget as well as an easy way to determine how much money should go into your emergency fund each month.

Next, decide whether you want a savings or a checking account. Savings accounts often pay greater interest rates than checking accounts, but they require more effort on your part to access them (e.g., setting up automatic transfers). Checking accounts are easier to use on a daily basis, but they often offer lower interest rates than savings accounts.

Next, set up an automated transfer from one account to another each payday until you’ve saved enough for an emergency fund.

building an emergency fund

Steps to Building an Emergency Fund

A. The target sum: setting a target amount to building an emergency fund is the first step in creating one. A minimum of six months’ worth of savings is suggested in India. Rent or mortgage, utilities, food, and gas are all examples of this category of costs.

B. Once you have settled on a target sum, the next step is to develop a spending plan. When making a budget in India, you have to think about a lot of different costs, like those for health care, education, and family responsibilities.

C. Third, prioritize your own financial well-being by always paying yourself first. In India, it is recommended that you put at least 20% of your monthly salary into an emergency fund.

D. Another strategy to make sure you always have money in your emergency fund is to set up an automatic savings plan. Put in place automatic payments from your bank account to your emergency fund, or have your paychecks sent directly to the fund.

E. When it comes to saving money, if you’re having a hard time finding extra hours in the day, it may be time to consider bringing in some more cash. Doing so in India can involve picking up a second job, going freelancing, or launching a microbusiness.

F. Next, think about using a high-yield savings account to help you save as much money as possible. In India, you can get high-yield savings accounts from both traditional banks and non-bank financial companies (NBFCs).

Always remember to take into account regional differences in the types of concerns when setting up an emergency fund in India. Getting medical attention, for instance, may cost more in India, so be sure to account for that. When making long-term financial decisions, cultural norms and responsibilities to one’s family may matter more than one might think.

Following these recommendations and considering India’s particular, you can start an emergency fund right away. Remember that preparing for unexpected bills will help you and your family sleep better.


Every Indian household needs to start building an emergency fund because the economy and society are so uncertain. A safety net can help a family avoid debt when unforeseen expenses arise. Building an emergency fund is crucial in India due to high health care expenditures, family obligations, and natural calamities. Indian households can build an emergency fund by following the steps in this guide. This fund can help them deal with any financial problems that come up.

It’s never too late to start building an emergency fund, and it’s never too early to start preparing for unexpected expenses. Indian households can start building an emergency fund today by making savings a priority, making a budget, automating savings, making extra money, and using a high-yield savings account. When you start early, your money has more time to grow and earn interest. Remember that every little bit helps, and even small contributions can make a big difference in the long run. Indian households can have financial stability and peace of mind if they work hard to build an emergency fund.

Labeeb Abdullatheef
Labeeb Abdullatheef

Labeeb Abdullatheef is an MBA graduate with a focus on Marketing and International Business. As a stock market investor for four years, I'm passionate about data analytics and apply it daily to analyze market trends. I'm committed to providing insightful outputs and dedicated to leveraging my analytical skills in the field of stock market investment.

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