An emergency fund is not important from the perspective of many. However, its importance cannot be ignored at all. The emergency, whether medical, financial, or even social, can lead to unnecessary stress, expensive loans, or unplanned liquidation of savings. Many of us come to know its importance by experiencing it off guard, at which point it is too late to address the problem. Therefore, it is necessary to reserve a small but considerable portion for contingencies. There is no vaccine for a crisis, but to block its impact on your finances, you can plan your emergency fund in advance. An emergency fund is important, but how do you plan for it? How much is enough for an emergency? Let’s check that.
To understand how to plan for an emergency fund, you need to know how much money can be enough. For simplicity, let us take an example of a financial emergency, where if you are a salaried person with a monthly salary of Rs 25,000, in case of sudden job loss, your emergency fund should be Rs 1,00,000 to Rs 1.50. 000 rupees. , that is, a minimum of four months to six months of salary. Therefore, it gives you enough time to take a break and get back to work without any additional stress. In case of medical expenses, it is always advisable to have medical insurance that includes your parents or in-laws, however, Plan B should be ready.
Now that we know how much fund can be enough, how can such a fund be created? An emergency fund is the hardest part of saving. Wise financial planning cannot be completed without building an emergency fund – imagine spending your down payment on your car for rent in the event of a sudden job loss! A 5-10% of your monthly income should help you build your emergency fund steadily without disrupting your other savings. Although, for beginners, the safest option is to create an emergency fund first and then start with your other savings.
The emergency fund asks for money at shorter notice and must be in highly liquid form or else the very purpose of the fund is defeated. Now, liquid form in layman’s terms means cash, but having a lot of cash at home can be an invitation to thieves. Therefore, investing the same in such options that can bring you the money right away makes more sense apart from the returns attached to such investments. So what are these investment avenues?
Liquid Investment Fund — Yield: 3-4%;
Short-term debt funds — Yield: 5-6%;
Fixed and recurring deposit — Yield: 4-5%
Savings Account: 3-4%
The above four are highly liquid but “make your money work” investment avenues that are highly recommended for building your emergency fund. However, it is important to note that excessive concentration on someone may not be helpful, therefore the spread of inversion across the spectrum is also noteworthy. Depending on the health of the dependents’ work environment or the general recessionary trend, it can be decided how to allocate the funds. For example, if the parents are over 75 years old, it is recommended to keep 40% of the investment in savings.
An emergency fund plays a crucial role in fulfilling your dreams. Therefore, building or rebuilding it is just as important as making investments. But the mere construction of the fund does not end the process. It is also important to review it based on inflation or age of the dependent, increase in the number of dependents, debt incurred, lifestyle, etc.
(The writer is the founder of Money Mantra, a personal finance solutions firm)
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Posted On: Sunday, January 30, 2022, 07:00 am IST