WHAT IS AN EMERGENCY FUND??
Life is full of uncertainties, one can always plan for his future in the best possible way but can never predict it’s outcome accurately and this is why one needs to build an “Emergency Fund” which acts like a safety net if things go south(Job loss, unexpected medical condition, accidents and etc). An emergency fund ensures that one is financially covered for a substantial period of time until things get back on track.
In this blog we will dive deep into this topic and answer the most common questions related to Emergency Fund
- What are the benefits of having an Emergency Fund?
- How much should I accumulate in my emergency fund?
- How can I build an Emergency Fund?
- Where should I park my money to build this fund?
WHAT ARE THE BENEFITS OF HAVING AN EMERGENCY FUND??
- PROVIDES FINANCIAL STABILITY – An emergency fund provides financial stability during tough times and ensures that the family is secured on the financial front if things turn bad. This financial stability provides an opportunity to handle the emergency well rather than concentrate about financing the emergency.
- INCREASES BARGAINING POWER – For instance lets say an accountant with years of experience and immense knowledge lost his job due to the pandemic and is in search for opportunities, had he built an emergency fund it would prevent him from taking low paying jobs in order to support himself rather he can wait and search for jobs which pay him as per his experience.
- DECREASES FINANCIAL DEPENDENCY ON OTHERS – Having an emergency fund in place ensures that one need not be dependent on others financially when an emergency arises and thus securing himself.
- CAN BE CONVERTED INTO CASH EASILY – An emergency fund is invested in assets which can be converted to cash easily at a short notice. We will discover the investment avenues later in the blog.
- DOES NOT DISRUPT THE POWER OF COMPOUNDING – Having an emergency fund does not disrupt the compounding effect of assets invested for the long term which otherwise would have to be withdrawn in absence of an emergency fund.
Your Emergency Fund Isn’t an Investment,
It’s an INSURANCE
HOW MUCH SHOULD I ACCUMULATE IN MY EMERGENCY FUND?
There is no particular rule which mentions the exact amount to be kept aside as emergency fund because it differs from person to person depending upon their lifestyle, however as per the rule of thumb it is advisable to cover expenses of 3-6 months but to be on the safer side one should build an emergency corpus which covers 6-12 months of expenses. For instance if your monthly expenses are about Rs 50,000 you should build an emergency corpus between the range of Rs 300,000- Rs 600,000.
HOW CAN I BUILD AN EMERGENCY FUND?
An emergency fund is not something which one can build overnight, it takes time and effort to build. Here are a few points to consider while building an emergency fund-
- Starting early is the key, don’t wait for an emergency to knock at your door
- Write down all your monthly expenses and set a target of building an emergency fund covering a minimum of 6 months expenses.
- Set aside a small portion of your monthly income as little as 5% to building an emergency corpus.
- Set a realistic target date by when you will have built your emergency corpus and stick to it in a disciplined manner.
If the above steps are followed diligently then it will produce results which are unimaginable and one day you will find your future self thanking you for it.
WHERE SHOULD I PARK MY MONEY TO BUILD AN EMERGENCY FUND?
Since an unforeseen situation can appear anytime without any prior notice it is advised to invest in assets which have high liquidity and provide safety of capital, below is a list of investment avenues to build an emergency fund-
- Savings Account
- Liquid Mutual Funds
- Debt Funds (Ultra short debt funds & Low duration debt funds) is not an ideal option but yet can be chosen
We hope all your doubts regarding emergency funds have been answered. If you haven’t built your emergency fund do it today. We at Mitra money believe that having an emergency fund is the need of the hour. If you need any help or have any further queries feel free to contact us.