Managing personal finances often brings up the question: Should you buy insurance first or build an emergency savings fund? Both are essential, but understanding their purpose and benefits can help you make the right choice.
Understanding Emergency Savings
Emergency savings is a liquid fund set aside for unexpected expenses like:
Medical emergencies
Job loss
Urgent home or car repairs
Key Features:
Typically 3–6 months of living expenses
Easily accessible in a savings account or liquid fund
Provides financial security during unforeseen situations
Benefits:
Reduces stress during emergencies
Prevents taking high-interest loans or credit card debt
Offers financial independence and peace of mind
Understanding Insurance
Insurance protects you against financial risks, such as:
Life insurance: Provides for your family in case of your untimely demise
Health insurance: Covers medical expenses
Property or vehicle insurance: Protects against accidents, theft, or damages
Benefits:
Shields your finances from catastrophic losses
Ensures family security and continuity of lifestyle
Reduces dependence on personal savings during major emergencies
Insurance vs Emergency Savings: What Should Come First?
1. Assess Your Situation
No Emergency Fund: Build a basic emergency fund first (at least 1–2 months of expenses).
No Insurance: Consider life and health insurance to cover major risks.
2. The Balanced Approach
Start Small: Open a liquid emergency fund while purchasing essential insurance.
Parallel Growth: Gradually increase both your savings and insurance coverage over time.
3. Why Both Are Important
Emergency savings handle small to medium surprises.
Insurance covers large, catastrophic events that savings alone cannot handle.
Practical Tips
Start with Health Insurance: Avoid high medical expenses that can drain savings.
Build a Starter Emergency Fund: Even ₹50,000–₹1 lakh can provide initial security.
Add Life Insurance: If you have dependents, ensure adequate coverage.
Gradually Increase Both: As income grows, expand emergency savings to 3–6 months and consider additional insurance like critical illness cover.
FAQs
Q1. Can emergency savings replace insurance?
No, savings can cover small emergencies, but insurance protects against catastrophic financial risks.
Q2. Which insurance is most urgent?
Health insurance and basic life insurance (if you have dependents) should be prioritized.
Q3. How much should I keep in emergency savings?
Ideally 3–6 months of monthly living expenses. Start small if needed.
Q4. Should young professionals focus on insurance or savings?
Start a small emergency fund and health insurance simultaneously; increase coverage and savings as income rises.
Published on : 3rd September
Published by : SMITA
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