How to build an emergency fund with high returns savings account

What is an emergency fund and why is it necessary?

Unexpected financial emergencies can come in various forms, be it a trip to the hospital, a broken phone, a home repair, or an appliance breakdown. An emergency fund means having a cash reserve that can work in the most unpredictable situations. This set-aside money has to be separate from your day-to-day expenses, so that you can use it when the need be.

No matter what your financial standing is, every adult should have an emergency fund. Creating an emergency fund is the foundation for every financial plan you make. Simply put, it is a non-negotiable part of personal finance.

How much money do you need in your emergency fund?

One of the first questions that may come to your mind is how much money you need in your emergency fund. While the question is common, there’s no common amount that works for everyone.

When you are building an emergency fund, there are several aspects that you need to factor in. Some of them are as follows:

1. The dependent family members that you have in your family
2. Your essential expenses include rent, utilities, groceries, and children’s fees
3. How much do you spend regularly on non-essentials such as eating out, shopping, subscriptions, or travel
4. The ongoing debts/ loan repayments
5. If you have an elderly person at home or a family member with a medical condition, you need a bigger fund
6. It is essential to keep inflation in mind so that you account for rising prices.

These factors can be very helpful when you need an estimate of “how much” you need. It is considered a general thumb rule that you should have about five to six months of your expenses as a cash reserve.

So, for example, if you are someone who spends around ₹50,000 a month, you can start with about ₹2.5 lakh to ₹3 lakh (5-6 times) in your savings account at all times. Gradually, you can increase this to ₹5 lakh or more to cover 10-12 months of expenses.

How to save for an emergency fund?

Creating an emergency fund becomes simpler when you build the habit of putting aside money. That’s also one of the fastest ways to see the money grow. Take a look at some steps that can help you build an emergency fund.

Step 1: Come up with an amount that you can save regularly

This is probably the most important step. Choose an amount that isn’t so big that you struggle to put it aside. Keep in mind that setting aside the full six-month expense upfront is not required. The amount should be sustainable and help you reach your target at the earliest. It is okay to start small, as long as you save consistently.

Step 2: Look for an account that pays you back

While most of us may have a zero-balance savings account, a simple yet practical way to speed up savings is to choose a high-return savings account. Not all banks would offer the same interest rates and features, so research is vital. Also, try to keep the emergency fund separate from your regular salary/ savings account, so that you can avoid the temptation to spend. Here are a few options you can consider:

• High-yield savings accounts
• Fixed deposits
• Overnight mutual funds.

Step 3: Keep the account only for emergency

When you are focusing on emergency fund planning, you need to remember that the emergency fund has to be for ‘emergencies’. Making a withdrawal when you’re out on a shopping spree, or for an everyday expense, may keep pushing the goal further away.

Step 4: Automate the transfer

Most banks and NBFCs today make it very easy to set up standing instructions for auto-debit features. Transferring money to the emergency fund account can seem like a non-negotiable bill payment.

Step 5: Keep replenishing it

Once the emergency is over, you need to prioritise replenishing the account. This will ensure that you have a financial cushion the next time life throws something unpredictable at you.

Benefits of high-return savings account for emergency fund planning

Prioritising an emergency fund may often seem challenging, but having a high-interest savings account can be a simple yet practical way to maximise your savings. Your account rewards your savings; you can see your money grow without making any extra effort or taking any risk.

Here are some benefits that a high-return savings account can offer you.

1. Your money stays liquid

The aim of having an emergency fund is to have quick and easy access to your money when you need it. Unlike deposits with a long lock-in, your savings account allows you complete liquidity, and you can withdraw money anytime you want.

2. You earn without risks

Creating an emergency fund in India becomes simpler with a high-interest account. It's like an investment without the worry of markets fluctuating. Your funds are safe, and the returns are guaranteed. While interest rates may inevitably fluctuate, your high-yield savings account will typically continue providing leading interest rates, as compared to most traditional savings accounts.

3. Additional features

Most high-return savings accounts offer the account holder advanced services. Online access makes banking extremely easy and convenient. Transferring money, monitoring the account, and tracking interest can be done in a few clicks, allowing seamless account management.

4. You have peace of mind

One of the biggest benefits of emergency fund planning is that it allows you peace of mind. Having a financial safety net allows you to experience financial well-being.

Who should prioritise this type of emergency fund?

While having an emergency fund is a good financial habit that everyone should have, it should be prioritised, particularly by the following:

1. Salaried individuals who have a fixed monthly income should be prepared for job loss or salary delays
2. Freelancers or entrepreneurs who do not have a regular income need to maintain financial stability
3. Individuals who have dependents relying on them financially
4. People who have some ongoing loans and liabilities
5. Individuals who are just starting their financial journey.

Conclusion

By getting higher returns on your savings account, you can accelerate the process of building an emergency corpus. If you’re starting your savings journey, opening a savings account with Jio Finance is a good idea. The digital onboarding process takes just a little bit of your time. Once you open a Jio Payments Bank Savings Account, you can easily upgrade to Savings Pro, which can help you reach your emergency fund goal.

With the Savings Pro account, your otherwise idle balance is invested in overnight funds, where, without an entry and exit load, you can aim for safe and stable returns. What’s even better is that the account allows automation, meaning you do not have to worry about actively managing your investments.

Download the JioFinance App today.