Deadly diseases, wars between nations, and an impending global recession. Amidst these looming dark clouds, children are the hope for the future the planet must hold out for.
As parents, it is instinctive to save for your children’s future, and there are numerous ways to go about it.
Fixed deposits, savings accounts, PPF, and dedicated “children’s savings accounts” provided by banks are the traditional routes, but what about the most crucial kind of money saving?
“Emergency funds” are the saving grace, even beyond the point of traditional savings.
Emphasizing the importance of emergency funds, this article is the one-stop-destination for parents to learn all about building EMERGENCY FUNDS and more.
Topics discussed:
1. What is an Emergency Fund?
2. How to Calculate Emergency Fund for your Child?
3. Steps to Building an Emergency Fund.
4. Where to Save Emergency Funds?
5. Children’s Savings Funds offered by Banks
What is an Emergency Fund?
An emergency fund is a dedicated amount set aside to be utilized during unexpected emergencies. Also known as a rainy day fund or contingency fund, this saving comes in handy in case of medical emergencies for your children, unplanned educational needs, if you lose your job, and other buffer expenses.
Emergency funds are a must for parents who manage their expenses on a monthly budget and have stringent means of traditional savings.
In many cases, more than one emergency fund is also required for parents with two or more children, considering all the fathomable contingencies.
Essentially, emergency funds are necessary backup for the working, middle, and upper classes, and here’s why.
According to the Bureau of Labor Statistics, an average household spends 62% of its monthly income on essential expenses. However, considering expenses grow as your lifestyle improves, it is easy to get carried away, expending money on nonessentials gradually.
How to Calculate Emergency Fund for your Child?
Calculating how much emergency funds to save boils down to your monthly expenses, including your child’s expenses.
For instance, if you and your spouse make Rs. 1,00,000 in monthly salary and spend Rs. 60,000 collectively, the emergency fund is calculated on the expense.
The next question to be answered is how many months should you save Rs. 60,000?
Experts recommend saving at least three to six months of your monthly expenses, which in this case come between Rs. 1,80,000 to Rs. 3,60,000. Experts also recommend saving at least twice the amount if you have two children, more than thrice the amount if you have three children, and so forth.
Furthermore, the equation changes if you have dependent parents or more members in the family.
In such a case, maintaining health insurance aptly for the elderly, utilizing liquid savings and FD, and even emergency funds can appease the stress of unplanned emergencies.
Steps to Building an Emergency Fund
Saving money in lacks for an emergency may seem like an arduous task, but individuals who have utilized these funds exclaim with the reassurance the importance of it. With a clear & cut plan, anyone can save for their child’s emergency, and here are the steps to follow.
1.Set a Monthly Goal
Once you have calculated the lump sum to be saved, start by depositing small amounts each month. Without finding yourself in a pickle or taking a loan, cut down on unnecessary expenses, and redirect this amount towards the fund. As tight as anyone’s monthly budget is, there are always expenses you can cut down each month.
2. Open a New Joint Account
When you’re accountable to your spouse, saving for an emergency becomes easy. Saving in a joint account as a married couple is not only easier but it ensures neither of you can withdraw money without the other’s consent. A separate account will also avoid accidental withdraws, and as they say, ‘out of sight is out of mind.’
3. Save First, Spend Next:
Mutual funds, EMIs, and other savings are a priority for your future, along with the emergency fund. Without undermining the importance of an emergency fund, continue saving for your future. If possible, automate all your savings as soon as your salary is credited, which makes it easier to allocate funds to your emergency.
4. Boost Income and Cut Down Expenses
A step that is often ignored, boosting your income is generally beneficial, not just to save for your emergency fund. Paving the way for a passive income, entertaining the gig economy, freelancing, and taking up side hustles are some ways to boost your income.
On the other hand, cutting down expenses work better than you can imagine, and there are quite a few ways to go about it.
Eating at home instead of ordering food, canceling unused OTT subscriptions, asking for interest rate reductions from banks, taking public transport, and other prudent practices can help dramatically.
5. Relocate Current Funds
It is advised to take as little time as possible to establish an emergency fund. To make this happen, you could redirect cash, liquid funds, FD, gold, cryptocurrency, and other forms of savings towards the emergency fund. With that said, do so with cognizance of your financial position, requirements, and interest rates.
6. Establish a Goal & Review Regularly
As vital as it is to save monthly, it is crucial to set yourself a deadline to meet as well. Based on the amount required to establish an emergency fund, experts recommend anywhere between 6 to 12 months as a deadline, but you may take up to 18 months.
Reviewing your budget and savings every three months is crucial as inflation adds uncertainty to the equation. Not to mention the increase in the cost of living, newer additions to your expenses, and other variables.
Where to Save Emergency Funds?
It is common knowledge that you don’t put all your eggs in one basket. Financial experts recommend diversifying emergency funds across short-term recurring deposits, liquid funds, and debt mutual funds. As the intention is to save for an emergency, earning returns in the process is not a bad idea.
Children’s Savings Funds offered by Banks
At last, make the most of attractive offers provided by banks to save for your children, and consider this an emergency fund. Some fascinating savings accounts offered for children are:
- Kotak Mahindra Banks’ “My Junior Account” offers an annual interest of 3.5% for savings accounts with a balance over Rs. 1 lakh.
- Indus Young Saver savings Account offers 4% percent interest.
- Axis Bank, HDFC, ICICI, and IDBI Banks offer 3% interest on children’s savings accounts.
These banks also offer education loans for lesser interest rates in the future, generous daily cash withdrawal limits, complete control of the account for parents over proprietary apps, and various other benefits as well.
Final Thoughts
Recently, the world experienced an emergency in the form of an unprecedented pandemic. Without bias of economic status, geography, race, or ethnicity, this equalizer taught us to be prepared for the worst, like never before.
Like Howard Ruff once said, “It wasn’t raining when Noah built the ark,” and nothing trumps preparedness in the face of adversity.