Emergency fund is a necessity

While most of us feel the need to have an emergency fund,very few of us actually have one.This article aims to change that. Why emergency fund is required? Let's start with the most basic question: Why?The following scenarios give some reasons: 1.Loss of job/loss in business-This is one nightmare most of us dread about.If you are a salary earner,job loss can be a cripling blow.Similarly, if you run your own business, a heavy loss can result in financial distress. 2. Sudden unforeseen expenses - unexpected medical expenses, spurt in school fees of kids, unforseen home expenses like repair of AC,Refrigerator etc..(This month my AC went bust and I had to shell out nearly INR 7000 to make it work again!) 3.The sole bread winner of the family (You!) meets with an accident resulting in temporary disability to earn money These are some of the instances wherein an emergency fund will help.It acts as a cushion against contingencies. How to determine the amount of emergency fund? To start with,four months of the take home salary is a good yardstick. The regular commitments such as rent,grocery,medical expenses and school/college expenses for children,emi commitments etc.. should be taken into account. 6 months of your take home salary is optimal. How to build an emergency fund? Invest in a FD, RD, ultra liquid mutual fund or just a separate bank savings account for emergency fund

Comments

  1. SauntaryaAugust 22, 2019 at 10:41 AM

    Rather than Rd, sip is a better choice for an investment continuing min 3 years. That fetches good return.

    ReplyDelete
  2. Arun RaghavAugust 23, 2019 at 5:08 PM

    While SIP in equity Mutual funds as a mode of investment is good, it will not fulfill the objective of an emergency fund, which is essentially immediate liquidity.The only option in case of mutual funds in this scenario is ultra liquid funds which are basically debt Mutual funds which provide varying returns which normally never goes to double digits. Emergency fund is first & foremost a contingency fund and the primary priority should be liquidity & capital protection, rather than returns, in my humble opinion.

    ReplyDelete

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