You might have heard about emergency funds or contingency funds often. In this article, we will learn
What are emergency funds?
How much emergency funds one needs to accumulate?
Where to invest your emergency funds?
What are emergency funds?
Emergency funds are funds that you need to accumulate to fund any kind of emergency that may occur in life. These emergencies could be medical emergencies, helping the family for urgent cash requirement, loss of job or income, funding transition between jobs, tackle uncertain income and delayed salary payouts.
These funds need to be kept liquid so that they are easily accessible within hours of the occurrence of an emergency.
One important goal of these funds is also to help you survive for a few months without monthly income.
How much emergency funds one needs to accumulate?
Now the next common question that may arise is how much funds should I save or keep aside as emergency funds. There is a simple rule. the idea of this article is to simplify these complex-sounding principles for you.
An ideal amount of emergency funds should be 6 months of your monthly expenses. Let’s say your total monthly expenses is INR 50,000 which includes literally all expenses that you monthly for your survival. you should consider loan EMI, bills, food etc in your monthly expense and arrive at an amount.
In this example, if your monthly expenses are INR 50,000 then you need to save 6 Months X 50,000 = INR 3,00,000 as emergency funds.
You may also save up to 12 months of your monthly expenses as emergency funds. Remember the calculation of monthly expense is an important element in this plan. if you underestimate your monthly expense it might create problem in unforeseen events when you actually need the money. If you overestimate this figure you might take a long time to accumulate these funds and also might lose on opportunity cost or returns you could have otherwise made by investing those funds in mutual funds etc.
Great progress, lets now understand Where to invest these emergency funds?
Emergency funds should be accessible to you within 24 hours when the need arises. So these funds need to be invested in instruments that are extremely liquid meaning withdrawal is easy and quick.
You can park your emergency funds in the following options
– In your savings bank account that gives more than average returns
– In liquid funds that give FD like returns but are extremely liquid
– Short Term Fds which can be withdrawn immediately
That’s all folks, it’s that simple. Don’t be shy go ahead and start saving your emergency funds which is the first step in your efforts to sort your finances.
