Emergency fund: Trouble in life always comes without telling. I do not know when what happens. A sudden job can be missed, a huge bill of the hospital may come, or the car may suddenly deteriorate. Then the biggest question arises, what to do now?
The role of Emergency Fund comes here. Many people in the world of personal finance often ignore it. But this is the first and most important step of financial security.
What is the emergency fund?
It is a separate money that is kept only to deal with the sudden financial troubles. Such as job going, medical emergency, or necessary repair of house-road. This money is not for any holiday, gadget or hobby, but its purpose is just to maintain your financial stability, when all the rest are closed.
How much money should be in the fund?
Financial experts believe that the size of emergency fund depends on your income and responsibilities. Let’s understand it properly:
| Profile | Essential fund |
| Employee |
3 to 6 months expenditure |
| Self -employment / freelancer |
6 to 12 months expenditure |
| Retired |
At least 12 months required expenses |
If your monthly expenditure is ₹ 50,000, then the emergency fund of 6 months will be ₹ 3 lakh and 12 months will be ₹ 6 lakh. You can also increase the emergency fund according to your convenience and economic status.
What are the things to keep in mind when creating emergency funds?
- If there is a chronic disease in the family, then the emergency fund should be big accordingly.
- If there are more members in the family, then responsibilities will also be big. In such a situation, make funds big too.
- If you work in contracts or risky areas, keep the emergency fund large.
- In the event of adequate health and term insurance, there will also be less money in the emergency fund.
- If the burden of loan or EMI is high, then keep more money in emergency fund in this case.
Where to keep emergency fund money?
You should keep the emergency fund in such a way that it can redeem it immediately. Emergency funds should be avoided in stock market or equity funds, gold or real estate or long-term lock-in FDS. Because it can take longer to withdraw money here, while in emergency, money is needed immediately.
Certified financial planner Gaurav Sharma says, ‘Emergency fund is like an ambulance, when needed, it is immediately available. It is not a means of any return or risk.
Let’s know about some schemes, in which you can keep the money of emergency fund.
| Option | Advantage | Interest/withdrawal |
Focus |
| 1. Savings Account | Immediate withdrawal, dicgc insurance | 2.5% – 4% interest |
Keep 1 month expense here |
| 2. Fixed Deposit (Sweep-in) | Better interest, capital secure | 5%-6% interest auto-break required |
FD is such that it breaks on its own |
| 3. Liquid Mutual Funds | Better returns, withdrawal in 24-48 hours | 5%-6% (Market-Linked) |
Keep a large part of the fund here, the risk is low |
| 4. Auto Sweep Accounts | Saving + FD balance, automatic transfer | Interest on fd rates |
Not in all banks, limited facilities |
| 5. Recurring deposit | Discipline, regular saving habit | Fixed returns, keep less tenure |
Useful when you are starting to make funds |
How to create emergency funds?
- First of all, assess expenses. Account to all necessary and non-essential expenses of your every month.
- Then plan to save the amount equal to the expenditure of three to six months.
- You can also start making emergency funds by depositing ₹ 1000- ₹ 5000 every month.
- Set up transfer to your emergency fund every month from your bank account.
- Review Emergency Fund annually. Keep increasing the funds of funds with marriage, children, loans.
Mumbai’s financial coach Nikhil Mittal says that keep the emergency fund only for real emergency situations. Such as medical emergency, job missing, salary delay, necessary travel.
If you want money for wedding, travel, gifts, you can create separate syncing funds for that. Actually emergency fund is not a fancy financial tool. This is your life backup system. If you do not have this, all other investment may be in danger.
Also read: Financial Freedom: How much money is needed to spend a comfortable life … 10, 20 or 50 crores?