5 Emergency Fund mistakes to avoid

We learned from the COVID-19 pandemic that the future is unpredictable and that we need to be financially prepared for anything. Layoffs, pay cuts, medical emergencies, and other unplanned expenses can all be covered by having an appropriate Emergency Fund or Contingency Fund on hand. On the basis of hope and preparedness, an emergency fund is essential. This is due to the fact that life frequently tosses us a curveball.

Keeping a smaller Emergency Fund

The financial impact of an unexpected event is difficult to estimate. You may be forced to use money set aside for other purposes, such as unforeseen emergencies, in order to cover the shortfall. You could also be forced to take out a loan.

Your Emergency Fund should, as a general rule, be able to cover three to six months' worth of ordinary monthly expenses, such as rent, EMIs, insurance premiums, etc. Your emergency fund should be at least six months' salary in the amount of Rs 2.4 lakh (Rs 40,000/month). If your family has a medical history, you may want to add an additional 5% to 10% to this amount. Consider your health insurance policies as well.

Investing in the wrong places

The Emergency Fund may occasionally be used to make money by investing in high-yielding but riskier investments (viz. equity mutual funds, debt mutual funds, etc). It might also be parked in areas that are more secure, but require a longer lock-in period, in order to guarantee a return (viz. Public Provident Fund, National Savings Certificate, Kisan Vikas Patra, etc).

A high level of liquidity and capital safety should be ensured while storing funds for unexpected expenses. Savings accounts, fixed deposits, and liquid funds/overnight funds can all be used to diversify your investment portfolio and keep your money safe.

Non-emergency expenditures of the funds

There may be times when you feel compelled to use the emergency funds you've set up for non-essential purchases. However, if an emergency were to arise, it could put a strain on your budget. The best way to avoid this is to only spend your emergency savings when necessary. Avoid spending this money on a vacation, upgrading your electronics, or purchasing a new automobile.

Leaving the emergency money in place after it has been used

Once you've used the emergency fund, you must immediately rebuild it and restore it to a sufficient amount. If necessary, you may have to cut back on luxuries, save more, sell assets, and take advantage of any unexpected windfalls.

When you don't look at your Emergency Fund

You can't keep your emergency reserve at a fixed amount. Reviewing your emergency fund may be required, depending on your current position. Your finances can be affected by events such as marriage and the birth of a child as well as divorce, a growth in debt and a lack of security at work. If you don't keep an eye on your Emergency Fund, it may not be enough.