Have an emergency fund or it will cost you

We are always told to expect the unexpected. Money wise we can only do that if there is an available fund to tap financial emergencies. The last thing we want to happen is getting into debt because of an emergency. It’s frustrating to go into debt just to bail out from an emergency.

What is an emergency fund?

Emergency fund is a money pool which is typically about 3- 6 months of your household’s total living expenses. For example, if you are spending Rs.30,000 a month towards your living expenses, you need to have Rs.1,80,000 readily accessible fund that you can use for the emergency.

Why maintain an emergency fund?

Medical emergency, loss of job, credit card debt, property maintenance etc could easily cause financial stress. An emergency fund can come in handy during these times.

How emergency fund should be?

The framework for emergency fund should be a combination of liquid fund easily accessible in a day or two along with fixed amount of savings of 3 -6 months of expenses with zero exposure to volatility.

How to create an emergency fund?

As a thumb rule, treat savings as an expense just like a utility bill so that one would be forced to set aside an amount for emergency fund. Here is my pick to get started:-

Automate your savings – Nowadays, almost every bank gives the facility to set an auto debit date and amount to transfer to the respective account. As soon as the pay check comes in, set the date and amount for transfer to respective emergency corpus. Click here

Start small – A penny saved is a penny earned. Do not try to make all the savings for emergency fund in one go as it is likely to cause financial stress. It is not important that you save in higher amounts, but it is critical that you make the process of saving a hobby and sustain it.Click here

Use Mutual Funds – Debt mutual funds are a good option for emergency funds. They have easy liquidity and less volatility. Debt mutual funds gives better returns than savings bank account interest (7 – 8% debt funds compared to 3 – 4% savings bank account) Click here

Get your health insured – Emergencies comes in the form of medicals. A health insurance will take care of sudden medical costs like surgery, hospitalization etc. Choose a health insurance that provides cashless hospitalization benefits to ensure that your emergency fund corpus remains untouched.

      Click here