Why you need an Emergency Fund—And How to Build Yours?
December 28, 2024
One fine morning you go to office and and your told that you are fired!
What you would do??
Do you have money to survive at least 3 months so that you can look for a new job? Or consider another situation where you are off to work and realize your car broke down and repair is going to cost you 25,0000 rupees. And you have invested all you money in stock market and your portfolio is 30% down. What can we do to get out of these kind of situation without accumulating debt your selling your assets for a loss
An emergency fund is meant to offer financial stability in the event that unforeseen circumstances lead to emergency costs.
Unexpected Expenses: An Emergency fund helps to cover medical bills, car/bike repairs, or home maintenance expenses that can cover anytime. Having insurance (which is a must) may not completely avoid incurring the initial expense & your repair guys most likely wont accept credit card!
Job loss: Incase you loose your job or experience a pay cut, an emergency fund helps to support you through out the period until it is sorted out.
Avoid Debt: Have you ever experienced the never ending debt cycle? Either you lend from someone or use your credit cards. Its due to lack of emergency fund and also due to, no or wrong budgeting.
Feeling secure: This is one of the most important factor many don’t realize. This reduces stress and anxiety and helps your mental well being and focus on your other priorities. You can finally physically and mentally fully present at you kid’s or spouse’s special occasion with out thinking of your personal finance.
Freedom to make decision : When you have an emergency fund, you can make decisions like quitting your job or starting a new business without worrying about money. Its best to have at least three to six months’ worth of living expenses saved in your emergency fund.
Invest effectively: You invest in stock or a mutual fund and after a couple of months you have to exit for loss as you need to cover for one your emergency expense. Sounds familiar? Having an emergency fund can avoid this situation.
How much money should I have as emergency fund?
There is no golden number for this. A simple difference such as the type of car you drive a BMW or a Maruti can make the whole difference. Or the type of medical insurance if its cashless or you need to pay cash upfront and claim later. Size of your emergency fund will depend on your lifestyle, monthly costs, your insurance and insurance type and dependents, the rule of thumb is to put away at least three to six months’ worth of expenses. Your monthly expense can be calculated from your Personal budgeting to which you need to add your expected the expense if medical bills, car/bike repairs, or home maintenance incur.
Emergency fund = (Monthly expense+expected expenses for medical bills,car bike repair,home maintenance etc)
Note:
Make sure you have planned for your known yearly expenses such as insurance cost (Life insurance, vehicle insurance, health insurance), income tax etc.
Where should I keep my Emergency fund
First and foremost factor you need consider is Liquidity! Second is to cushion the damage caused due to inflation with lowest risk. Do not consider this as an investment but an insurance or contigency plan not to disrupt your other long term investments.
Options are:
- Savings Account
- Overnight Account
Savings Account
Features of a Savings account
High Liquidity: Savings accounts are easily accessible with your debit card or gpay. In an emergency, you can withdraw funds quickly without penalty.(Unlike Fixed Deposits)
Safety: Savings accounts in India are insured by the Deposit Insurance and Credit Guarantee Corporation (DICGC).
Low risk: The principal balance in a savings account won’t fluctuate, offering a stable place for your emergency funds.
Overnight Funds:
Features of a Overnight Funds
High Liquidity – Overnight funds mature in one day. And if you wish to withdraw, money will be in your account next day.
Low risk- Its invested in low risk financial instruments and matures in one day making it stable. It typically offers better interest rates than Fixed Deposits. Short investment horizon and instant maturity makes this a good option to save your emergency fund.
You may allocate your Emergency funds in both the above options;
Savings Account – 30%
Overnight Account -70%
Maintain Emergency Fund:
Maintain your emergency fund with discipline. Only use emergency fund for true emergencies. If you use it to buy the new iPhone model after your late night scrolling session or a
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