Unexpected situations may come at any time and you may be in one which may have an impact on your finances. In such situations, you need to have an emergency fund that comes to your rescue. Let us understand why it is important to set up an emergency fund in the UAE.
The emergency fund is an amount set aside for any emergency situation and financially tough times like the loss of a job, loss in business, health issues or any emergency situations in life.
This emergency money will cover the expenses before you find an alternative solution and recover from the state.
Why you need an emergency fund?
- If you lost your job or incurred loss in your business then surely the emergency fund that you set aside will come to your rescue. Your expenses can be covered until you get a job. Emergency funds can help you in paying utility bills, domestic household expenses, and other personal expenses.
- If you are into a business you can make payments to contractors and suppliers with the emergency funds. You can overcome losses in business and attain stability. Over a period of time, you will again start earning profits.
- It is mandatory to have health insurance in the UAE, your health insurance may not cover a specific illness treatment or if your family member has to undergo treatment. In such cases, you can use the emergency fund to undergo treatment or cure a specific illness.
- If someone passed away in your family then all assets in their name will be locked. Until you get all your paperwork done, an emergency fund will help you to take care of your financial needs.
- Emotionally and financially it is a stressful situation to deal with, but the emergency fund will make you fully prepared to deal with an extreme situation with self-confidence.
How much amount is required for the Emergency funds?
It depends on your monthly income as to how much an emergency fund can be set up. An emergency fund can be three to six months of your monthly income.
For instance, if your monthly income is AED 30000 a month and AED 15000 is spent on your monthly expenses, then you should set up an emergency fund in range AED 60000-100000
How to save money for an emergency fund?
An emergency fund should be set up and fund allocation should be done periodically. Every month set aside a specific amount in bank account. Slowly it will grow into a big amount. Suppose you have planned for an emergency fund of AED 100000.
Now for this amount, you have to set aside AED 5000 or 10000 every month to reach the target. You can even reduce your investments to reach this amount.
Click here to know about Zero Balance accounts in UAE
Where to save money for an emergency fund?
The best options to save money for an emergency fund are
Savings account- The main purpose of a savings account is to give you quick access to your funds. This advantage enables you to use your money when required especially in times of any emergencies. In the UAE, interest or profit rates on savings accounts are between 0.01% to 5% per year.
Click here to know about Savings account in UAE that can help you in building Emergency Funds
Bonds- In the UAE, the National bonds scheme offers are provided. It offers customers monthly draws where you can just not only do savings but also win prizes.
For more details on rewards and programs visit the official web page of national bonds rewards program
Prize-linked accounts-Some banks in the UAE offer a prize-linked account. It gives a chance to win prizes which may include cash prizes, luxury car, studio apartment with multiple cash giveaways which could be daily or monthly draws.
Fixed Deposits- The returns on fixed deposits are higher than a savings account. You can choose a fixed deposit amount and your account will fetch interest rate.
The Return on Investments (ROI) on fixed deposits will depend on the two factors. One is the tenure for a fixed deposit and the other is the amount of deposit.
In the UAE, most of the banks offer short term and long term fixed deposits. Based on your income earning capacity you can choose between them.
The tenure of fixed deposits begins from 1 week, 2 weeks, 3 weeks and continues to grow up to 5 years. If you want to withdraw money before the tenure you must pay a certain amount as a penalty.
Takeaway
Emergency funds always give you hope of overcoming any financial challenge. In the UAE, Financial advisors advise everyone to have a savings habit, these savings amounts should be invested for the purpose of emergency funds. In times of any financial crisis, your emergency funds will come to your rescue and uplift you from the financial crisis.