Life is uncertain and may take sudden turns which may cause financial turbulence. Emergency funds can bring financial stability and peace of mind in crucial times. Here, in this post we will together explore more about Emergency funds, why they are needed, the best emergency fund investment in India and more.
Table of Contents
What is an Emergency Fund?
An emergency fund is a money reserve set aside to cover unexpected large expenses or financial emergencies.
“Call it an emergency fund, contingency fund, or rainy day fund — whatever the name, it’s your financial buffer against sudden, unexpected expenses.”
Emergency Fund Example?
Emergency or contingency can be of any type such as a sudden medical emergency, job loss, accident or something else. It can also be a situation mentioned below:
- Job Loss
- Medical Expenses
- You cannot go to job/leave job because you have to take care of a family member
- Immediate home repairs
Why is it Important to have an Emergency Fund?
Life may bring twists & turns to your financial life. These emergencies can disturb emotionally, physically, mentally and financially. When such situations arise, the economic impact is the worst. Thus, it is always better to be prepared with armour rather than be a victim.
Here’s why having one is crucial:
- Peace of Mind: Knowing you have money set aside helps reduce stress during uncertain times.
- Avoid Debt Traps: An emergency fund keeps you from relying on high-interest credit cards or loans.
- Stay on Track: It prevents you from derailing your long-term financial goals like buying a home, funding education, or retirement.
- Quick Recovery: With ready cash, you can focus on solving the problem instead of scrambling for money.
Let’s make it more understandable with the help of an example.
What if you don’t have an Emergency Fund
Bestii 35, had good investments in mutual funds, life insurance, PPF, and PF. He had enough health insurance too.
But suddenly due to a major accident, he lost his job. Medical expenses were paid from a medical insurance policy. But, what about other day-to-day expenses?
Status of Existing investments in such case
- mutual funds – The market is declining right now. Withdrawal will cause loss and exit load
- Life insurance has a lock-in time.
- Withdrawal from PPF and PF is a little time-consuming process
Mutual Fund Taxation – How Your Gains Are Taxed?
Bestii Singh has not kept separate funds for such unforeseen events.
Looking at the condition he has to liquidate money from his savings.
Ultimately losing money in the below-mentioned ways:
- A penalty for early withdrawal
- Compromising on interest/return
- Consequently compromising on your future financial life goal.
How Much Emergency Fund Should I Have?
Ideally, a minimum of 3-6 months of living expenses are enough to fulfil such unforeseen situations. However, considering the corona-like situation in the recent past, one can aim for a higher corpus worth 12/ 24/36-month expenses.
These expenses include household expenses, utility bills, miscellaneous. expenses, insurance, loan EMI, mutual fund SIPs if any.
Save three months of expenses if:
- You are single with no dependents and a stable income.
- You’re married and each of you has a stable income.
Save six months of expenses if:
- You’re married with a single income.
- You’re a single parent.
- Your job is seasonal.
- Someone in your home is chronically ill.
- You or your spouse is self-employed, works on commission, or has a highly irregular income.
Where to Keep Emergency Fund?
There are plenty of options to keep an emergency fund. But these investing options must be
- Highly liquid
- Safe investment
- Decent returns
Where to invest Emergency Fund investment India
The below-mentioned investments are highly safe, and liquid and provide good returns. These options can be chosen in combinations of 2/3 options. You can park emergency fund in any of the below options.
- Saving Bank A/C
- Fixed Deposit
- Sweep in FD.
- Liquid or Money Market Fund
- Ultra Short/ Short Duration Fund
- Short Term Debt Funds with zero Exit load
How to build an Emergency Fund?
One can build an Emergency Fund investment by setting aside a part of income in a savings account/ SIP / Recurring deposit / Fixed Deposit or some other investments. If lump-sum saving is not possible then an Emergency corpus can be built by slow and steady investments periodically.
- Invest in a Recurring Deposit to build an emergency fund.
- Start a SIP
- Fixed Deposit
Conclusion
Emergency Fund investment is just like Plan B for unplanned sudden financial needs. This contingency money must be set aside to run your life expenses smoothly without any fuss.
If you are serious about wealth building, it’s better to take professional help.
You can always work with a Certified Financial planner and plan your finances, including Emergency funding, building a corpus for house purchase, and taking care of your health needs, plan a better retirement income in your second inning, leading to a more secure and financially stable retirement.
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