Table of Content
What is an Emergency Fund?
Importance of an Emergency Fund
- Job loss
- Pay cut
- Car repairs
- Relocation due to new job
- Home repairs
- Unexpected bills or unpaid bills
- Medical emergency or medical expenses that are not covered or not fully covered by the health insurance plan
- Death in the family that requires you to cover the funeral and other associated costs
How Much Emergency Fund Should I Have in India?
Hence, the right emergency fund amount differs from person to person. When calculating the emergency fund amount, it’s important to consider the minimum amount you need to get through your monthly expenses. These expenses include electricity bill, loan repayments, home loan, rent, etc.
You may even divide your emergency fund into 2 categories:
For long-term goals
This fund can be used for huge emergencies like a major natural disaster or a sudden medical emergency. Invest this fund in financial instruments that allow you to earn slightly higher returns and which can be liquidated within a couple of days’ notice.
For short-term goals
This is your rush-to fund when in an emergency. Invest this fund in saving vehicles where immediate accessibility and not high return is your priority.
Why Keep Emergency Fund Liquid?
- You should be able to withdraw money when you need it without any delay.
- There should be no penalty for early withdrawal.
- The amount you invest in an emergency fund should be able to deliver good returns.
How to Build an Emergency Fund?
- Determine the Fund Amount You Need
Deciding the right amount to set aside for emergencies requires a disciplined approach: Here’s the best approach to help you get started:
- Evaluate your monthly income inflow and outflow, which will give you a clear idea of how much to save.
- Try to curtail additional expenses and find out more ways to save.
- Put additional money to work by investing it.
- Choose the Right Investment Options
Once you have determined the amount to be put aside in the emergency find, it is important to find the best saving instrument to keep it.
When investing in creating an emergency fund, it is best to choose the right investment options that are:
- Easily accessible
- Earn higher returns on your savings
- Safe from market fluctuations
- Stable and reliable
Where to Park Emergency Fund?
Some of the best investment options are as follows:
- Savings Account: You can easily open a savings account with a bank to keep your emergency fund. Although savings account guarantees easy liquidity, the returns of the invested funds are low.
- Chit Fund: Parking your emergency fund in a chit fund ensures quick liquidity as well as good returns compared to a bank savings account. For safe and secure investment, invest using digital chit fund app like The Money Club.
- Mutual Funds: If you have healthy savings, stable income and are in a position to afford market fluctuations, you can consider investing in mutual funds. ROI can be high, but it is a risky investment.
- Fixed Deposit and Recurring Deposit: These investment options offer quick liquidity and a higher interest rate than a savings bank account. But, pre-withdrawal from these accounts can attract a penalty.
- Automate Your Investments
When creating an emergency fund, it is wise to set up an automatic transfer from your primary account to your emergency fund account.
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