Why You Should Maintain An Emergency Fund And How To Manage
An emergency is the amount of money you have set aside to meet any kind of financial emergency including unexpected house maintenance, medical bills, pet emergency, job loss or car repairs.
Managing your budget is a daunting task in a volatile job market and the possibility of unforeseeable emergencies at any time. You need to have an emergency fund for an unexpected financial emergency round the year.
The only way you can stay immune to financial uncertainty is by creating a saving buffer – an emergency fund. An emergency is the amount of money you have set aside to meet any kind of financial emergency including unexpected house maintenance, medical bills, pet emergency or car repairs.
Why not Credit Cards?
Credit cards do cover our emergency expense needs, but they do come with a condition. You need to pay credit card bills on time or face hefty interest and other late payment charges. However, an emergency fund is a boon in case of job loss as finding a new job could take a few or several months. Having such an amount of money at disposal empowers you to deal with abrupt problems more confidently without having to worry about financial survival.
This is why financial experts recommend maintaining an emergency fund equivalent to your three to nine months of monthly expenses. However, it is not necessary to instantly accumulate such a big amount instantly. You can start small by building an emergency fund of 30,000 INR to 50,000 INR first. You have to stay patient while your emergency fund gradually grows to meet your monthly expenses of at least six months.
How to Determine the Number for your Monthly Expenses?
Monthly expenses depend on family to family. The idea is to create a budget through which you can comfortably pay all your monthly bills without any income for three to nine months.
Calculate all your monthly bills, luxuries like eating out once in a while and shopping for clothes. However, you can exclude luxuries and strict to a tighter emergency fund which just helps you to meet the basic necessities of your household.
Where to Keep Emergency Fund?
You should know that you haven’t kept this fund to make extra money out of it. It is essential to keep your emergency fund easily accessible round the clock. Hence, it should be held in a high-interest savings account or money market account. Here are three buckets you can create for your emergency fund:
1. Sweep-in FD – Keep 40,000 to 50,000 INR to cover first month expenses.
2. Liquid Fund – Keep 1 to 1.5 lakh in a good liquid fund to cover the expenses for the next 2-3 months.
3. Hybrid Fund – Keep 2 to 3 lakh in hybrid funds to cover expenses for another six months.
The amount saved as an emergency fund will often lure you to spend on luxuries like a cruise vacation, a new car, new gadgets and appliances among others. It is essential to differentiate between an emergency and a luxury.
Take Insurance to Decrease Liability on Emergency Funds
Health insurance and life insurance among others will decrease your reliance on emergency funds and help you feel more secure. Taking required insurances will also enable you to keep a slimmer emergency fund and invest more smartly.
Revisit your Emergency Funds
Accumulating a certain amount is not the end of the road. You need to periodically access your funds and replenish it regularly to make essential adjustments for inflation, lifestyle changes, increased family member and change in debt liabilities. It is advisable to review emergency funds at least twice a year to keep them potent for a rainy day.