From job loss to an urgent medical emergency to sudden maintenance needs at home, financial emergencies can crop up in any form. An emergency fund is that pool of money which is easily accessible whenever unforeseen expenses strike. It is wise to be prepared always. Whether salaried, freelancing or having your own business, be ready with an emergency fund to meet the uncertainties of life.
Benefits Of Having Emergency Fund
You should set up an emergency fund since emergencies come unannounced. An emergency fund will help you in following ways:
Peace Of Mind: Your financial health becomes the first casualty in case of an emergency, plunging you in deep stress. An emergency fund will ensure peace of mind and would give you confidence to tide over uncertainties.
Will Not Let You Compromise: Suppose you are temporarily unemployed, you can take care of your expenses through your savings while still looking for a job. However, if you do not have an emergency fund in hand, you may have to compromise with the first offer you may get or make a bad financial decision. In a nutshell, an emergency fund equips you with better bargaining capacity.
Will Save You From Needless Debts: In case an emergency strikes, you won’t have to rely on loans to fulfil your daily needs. An emergency fund can take care of your needs and expenses easily, without the threat getting indebted all of a sudden.
How Much Emergency Fund Do You Need?
After factoring in your expenses, work on an emergency fund sufficient to meet your monetary needs for the next 3-6 months. Think of it as your current monthly income multiplied by 3 or 6. You can always save more than this level. While calculating your liquidity needs, include expenses like debts, rent, utility bills etc. It may appear daunting in the beginning, but with time you can create a handsome emergency corpus. But this, of course, has to be top priority.
The fund should be topped up periodically to account for inflation as well as your rising income and changing lifestyle.
Whether your spouse is salaried or not could be an important factor in deciding the corpus size. The size would be bigger if you have children, parents and spouse to support.
The investment avenues you choose to park your emergency corpus should provide you easy liquidation and accessibility. Savings bank account, recurring and fixed deposits and liquid mutual funds are your best options.
Investment Options For Building An Emergency Fund
Recurring/Fixed Deposits: The ease with which fixed deposit and recurring deposit accounts can be created and liquidated make them a popular choice to store money. You can invest a specific amount every month (or periodically) and can earn higher interest rate than a savings account. You can easily liquidate this investment during an emergency.
Savings Bank Account: A popular medium to save money, a bank account is easy to operate, and also provides easy accessibility to cash through debit cards via ATMs. You can earn interest rates ranging between 4-6 per cent from this account.
Liquid Mutual Funds: These are debt mutual funds mainly invested in fixed income securities with short maturity period. These funds have no lock-in period and can be redeemed within 24 hours. Since the tenure of the underlying securities is short and normally does not stretch beyond 91 days, these funds have lowest interest rate risk as compared to other mutual funds.
You can tackle any emergency if you are financially well-equipped. Setting up an emergency fund is financially empowering and a necessity so create one today.
The writer is CEO, BankBazaar.com