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An emergency fund is money set aside for use in case of sudden or unplanned expenses or contingencies. This money needs to be available for immediate use in emergencies. Without this safety net, people have to run for money, depend on loans or use credit cards with high interest rates.
How Big Should Your Emergency Fund Be
An emergency fund is part of what you need to do before investing in financial goals. Read more here: For those who have heard of goal-based investing, how do I get started?
Want To Build An Emergency Fund? Here’s A Detailed Guide On How You Can Do It
An emergency fund prevents the need for new debt: Both personal loans and bad credit cards have extremely high interest rates. If you already have a loan, an emergency will put a huge strain on the monthly budget. People who earn well and save sometimes take their good fortune for granted and neglect to have an adequate emergency fund. It is one of the axioms of personal finance.
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Since a middle ground is required, the standard recommendation is six times (6x) the cost calculated in the previous step:
Since monthly surplus = income in hand – mandatory spending, aggressively start saving most of the excess to build an emergency fund until at least 3x the savings. Don’t invest in long-term (>5 years) goals until at least 6x saved.
How Much Should Be Your Emergency Fund Amount?
Divert all bonuses, gifts, etc. to build your emergency fund until you reach at least 6x. If your spouse has no income, please consider allocating a little more to your emergency fund.
You can consider the psychological hack of keeping one year’s school fees of children in a separate bank account as FD. This FD will give you peace of mind that your children’s schooling will not be disrupted due to any emergency.
Important: Replenish the emergency fund if you use it to the original level. Review the 6-12x requirement whenever things change: job, family situation, etc., to make sure you have enough coverage.
Warning: For those with large liquid portfolios (in stocks/debt MFs), it makes no sense to exceed 12x as an emergency fund. Since then, you are building up a lot of capital that can be used for long-term goals.
How Much Should An Emergency Fund Be?
An emergency fund needs to be liquid, i.e. immediately available. Besides household cash, bank accounts offer the next best place, followed by liquid mutual funds. Don’t chase returns here and lock up this money as not available.
For banks, you can go with big banks like SBI, HDFC or ICICI (due to their SIFI status) and look for banks that offer sweep FDs. If your bank doesn’t offer sweep FD, fine – keep some money in savings account and some in FD. Make it a joint account with all adult family members and have multiple debit cards. At all times, look for good ATM coverage for your bank and set up netbanking through apps on your phone. Avoid banks that have been in the news recently for problems in their operations or have a history of frequent trouble.
After selecting a bank account, liquid mutual funds can be used (choose a liquid MF that invests only in 91 days T-bills and cash). If you can’t decide which fund has this feature, please stick to banks.
A high-limit credit card can be used as part of an emergency fund if you have the money to pay it off and use it in an emergency. However, sometimes hospitals or medical stores cannot accept credit cards, so this should not be your first choice.
Building An Emergency Fund
Don’t keep family gold, stock/equity MF etc as an emergency fund – these are not liquid and can suffer losses if sold in a down market. This is for long-term emergencies like medical treatment etc., where everything needs to be spent.
Many people opt for housing loans or overdraft accounts like SBI Maxgain etc. for emergency funds. However, please do not do this as the lender may change the withdrawal terms or it is difficult to withdraw money in an emergency. Only the EMI portion of the fund should be stored here.
Ultimately it’s helpful if you wish you never had to use your emergency fund but it’s a relief to know it’s there.
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Infographic: Do I Have An Emergency Fund?
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These articles explain the concept of how a sweep FD can help you earn higher interest rates by keeping your money liquid and safe.
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What’s The Right Emergency Fund Amount For You?
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This post is titled Emergency Fund: What, Why, How Much to Save and Where? First appeared on 27 May 2021 at https://
We are currently at 313 posts and growing rapidly. Search on this site: Copyright © 2021-2023. All rights reserved. Most personal finance experts agree: The first thing you should do — after meeting basic needs — is establish an emergency fund.
Building And Maintaining An Emergency Fund
Life is full of unexpected surprises, many of which cost money — a thief smashes your car windshield, your son gets sick, your water heater overflows. When people live paycheck to paycheck without any savings, they are at the mercy of these small emergencies. Sometimes a small problem becomes a big one because the victim was not prepared for the potential trouble.
What is an emergency fund? An emergency fund — or “rainy-day account” or “safe and sound money” or whatever you want to call it — is a chunk of change set aside specifically for the unexpected things life throws your way. It is not used to buy a new car. It is not to be used for a vacation in Paris. It is not used to remodel your bathroom. It is only for use in case of emergency: a tree falls on your house, your youngest daughter breaks her arm, you lose your job.
Unnecessary if you are rich. But these friends are not rich. For most people, an emergency fund is a form of self-insurance. It’s a proactive way to protect you and your family from random crappy events.
Although personal finance experts agree an emergency fund is necessary, there is no consensus on how much is sufficient. Here are just a few recommendations:
Introducing Emergency Fund In 02 Minutes
Is better than nothing. Set aside $500. or $100. or $20. Over time, work to build this buffer until you have $1000 or $5000 for a disaster. Ultimately, you’ll sleep better if you have six to twelve months of living expenses in the bank. It’s nice to know that if you lose your job, you won’t immediately lose your home.
Finally, it is wise to keep your emergency money in a place that is not too easy to reach. (Ignore this piece of advice if you know you are disciplined enough not to use the money for other purposes.)
For example, you can open a bank account across town. Or deposit money in internet bank. Or put money in a certificate of deposit. Do not carry a debit card linked to your emergency fund. You’ll have access to cash when you need it, but you’ll be forced to consider your actions before withdrawing.
But what is a crisis? This is an interesting question, and one I’ve thought about a lot lately. How do you determine what is an emergency and what is not?
What Is An Emergency Fund And How Much Do You Need?
Sometimes the answers are simple, of course. A Florida vacation is not an emergency and should not be funded from your emergency fund. New boots are not