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It is advisable to be well-prepared for emergencies. Part of this preparation is securing yourself financially. This is where an emergency fund comes in handy.
Here’s more information on it, why it is important, and where you should keep it.
What is an emergency fund?
It is an amount that you keep aside for times of need. This fund creates a financial cushion to fall back on in times of unexpected scenarios like a job loss, accident, natural disaster, or death. This fund eases the financial stress that you or your dependents may experience.
How much do you need to put into your emergency fund?
There is no fixed amount that works in everyone’s favour. There are many factors that you should consider when building an emergency corpus. Some things that you need to take into account are -.
- Your dependents
- Your daily expenses
- Lifestyle expenses
- Your debts and EMIs
- How healthy you and your dependents are
These expenses can give you a rough estimate of the amount you should put aside for emergencies. Ensure that you factor in market inflation as well.Experts advise on having at least 5-6 months of expenses in an emergency fund. For example, if your monthly income is Rs.40,000 you should put aside about Rs.2,00,000 for emergencies.
Where do you put your emergency corpus?
Where you keep your emergency fund is just as important. We give you some options.
- You can open a savings account with a bank for your emergency corpus. The interest that accumulates in your account is an added plus.
- You can also opt to park your funds in a fixed deposit. Even though your money is safe, the returns might not be as high as other investment options.
- Another place to secure your emergency corpus is market funds. Make sure to check your risk profile before investing
An effective strategy for making the most of your emergency fund is spreading it across a variety of financial instruments. This can include a mix of debt and equity-linked market funds and a savings account and FD. The market funds can get you returns for your investment while the savings account and FD ensure that your money is safe.A pension plancan also be of help in emergencies.
Where to save also depends on which emergency you are planning for. If you are preparing for a short-term, you must put your money where you can easily access it. However, if you are planning for the long term, you can invest in market funds or FDs where it takes time to liquidate the funds.
Wherever you may choose to put your funds, ensure that you access them only in times of dire need. Also, ensure that you do not dive into your savings for emergencies, because that may derail your long-term life goals.
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