How New Earners Can Easily Build an Emergency Fund

You’ve just started earning and now saving money feels like a challenge? Your salary can easily disappear due to expenses like travel, food, and shopping. Even in such a situation, it is possible to set aside a certain amount of money to prepare for unforeseen circumstances. Here we will discuss the need for an emergency fund and how you can save up.

When life throws you curveballs like medical emergencies, unexpected trips, or unexpected expenses, do you feel like you should have a financial cushion? It is then that an emergency fund comes to your rescue. This allows you to deal with surprises without having to borrow money from your family, friends or financial institutions. You are not only prepared to overcome difficulties, but you are prepared to face them with ease and confidence.

Key Features of an Emergency Fund

• Fund Size

Have you considered how much would be a reasonable amount for an emergency fund now that you’ve started earning? A good target is 3 to 6 months’ worth of your monthly expenses, typically around ₹10,000 to ₹20,000. This amount should grow over time as your earnings increase.

• Liquidity

Keeping your money in a liquid form, such as a liquid savings account or mutual funds, can help you withdraw it quickly without penalty.

• Separation from Regular Accounts

Start another account for your daily cost to avoid the use of emergency funds. This creates a psychological barrier that is useful for maintaining discipline.

• Purpose-Driven

The amount in your emergency fund should not be used for planned expenses, travel, impulse purchases, etc. It should be used when unexpected financial needs arise.

• Consistency in Contributions

Building an emergency fund requires regular contributions. You should aim to set aside a small, fixed percentage of your income regularly, probably 10-20%. Over time, this amount should gradually increase.

• Risk-Free

Consider keeping your funds in low-risk or no-risk options, such as a savings account, rather than high-risk stocks. Because your emergency fund needs to be there so you can access it quickly when you need it.

• Replenishing Your Fund

Have you used your emergency fund? Then restock as soon as possible. This amount will ensure your financial security.

Why is It Important to Have an Emergency Fund?

This is important for any new earner as it provides a financial safety net during uncertain times. Here are some tips on why this is important:

Unexpected Expenses

An emergency fund can help you deal with unexpected expenses like higher education costs, sudden travel, medical emergencies, and so on.

Financial Independence

An emergency fund can help you become more financially independent in times of need and reduce your reliance on family and friends. It educates you about valuable financial habits.

Job Loss or Income Disruption

If you are a fresher without a regular income, especially in freelance work, internships, or part-time jobs, an emergency fund acts as a safety net and helps you cope without facing financial stress during such periods without income.

Avoid Debt

Taking out credit cards, personal loans, and other high-interest borrowing to cover immediate expenses may seem like a backup, but it will lead to a vicious cycle of debt that will make it harder for you to reach your goals and become financially stable over time. So maintaining good habits will help you in the long run, which is the key to staying financially secure.

Peace of Mind

Want to focus on your career development? An emergency fund can help you stop worrying.

Developing Good Financial Habits

Are you facing financial obligations like rent, loans, or family commitments when you transition to a full-time job? Then creating an emergency fund encourages you to save, budget, and plan financially.

How to Build an Emergency Fund?

If you’re a new earner, building an emergency fund can do wonders for your happiness and financial security. Here’s how you can start saving extra income without disrupting your lifestyle.

• Start Small

No need to save an entire month’s expenses right away. Let’s start small with a manageable goal of ₹10,000-20,000 yearly. This will help you to cover short-term unexpected costs. This small amount can be a lifesaver.

• Allocate a Fixed Amount

The next step is to set aside a percentage of your salary on a regular basis. Make it a habit. Start saving 10-20% of your income. For example, if you earn ₹20,000 a month from a part-time job, try to save between ₹2,000 and ₹4,000.

• Keep a Separate Savings Account

Did you know that having a separate savings account for your emergency fund can help ensure it isn’t used for everyday expenses? Find a bank that offers zero-balance accounts to avoid maintenance fees. Keep in mind that higher interest rates on savings accounts can mean your money grows a little faster.

• Cut Down Unnecessary Expenses

Prioritize eating at home. Avoid impulse buys, take advantage of discounts, and use free alternatives like YouTube for entertainment to cut down on spending. Creating a budget helps you track your monthly expenses and identify areas where you can cut back.

Budgeting tools for students:

• Walnut: Tracks your expenses and helps create a budget.
• Money View: A user-friendly app to monitor your transactions.

• Use Cashback and Coupons

Make use of cashback and coupons. You can save even more by wisely using digital payment offers. Deposit saved money in your emergency fund.

• Earn More Through Side Gigs

Consider additional side hustles that can increase your income with minimal time investment.

• Tutoring peers or offering coaching services
• Freelancing
• Content creator (blogging, YouTube) 

• Consider Short-Term Investment Options

Consider investing a portion of your income in low-risk short-term investment options like Recurring Deposits (RD) with monthly investments starting from ₹100, Liquid Mutual Funds that offer liquidity and slightly higher returns than a savings account, and Public Provident Fund (PPF) for long-term investment that offers tax-free returns.

• Avoid Using Credit

It is not advisable to use credit cards or personal loans to cover emergency expenses. Relying on credit can lead to high-interest debts. Instead, focus on building your own emergency fund, keeping credit as a backup option.

• Be Disciplined

Unless you face a true emergency, such as a health issue or unexpected expense, consider the fund sacred. Consistency is key, so be disciplined.

Conclusion

An emergency fund is all about consistency, discipline, and small but consistent contributions. You can start with a simple and achievable goal. Make use of perks or rewards and make it a habit to set aside a portion of your earnings. This will ensure you have a cushion to rely on when life throws unexpected surprises your way.