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EMERGENCY FUND

Each one of us wishes to have a life in which everything moves or take place as per our intentions or wishes. But life does not go as per our tastes, preferences, likes or dislikes and that too in all and every situation. We want safe heavens financially but it doesn’t happen all the time. There can be differences in reality and expectations.

We may face situations like job loss (pink slip) or job transfer, closure or interruptions in business, temporary illness or sudden unplanned outflow of cash for any reason like close relative’s marriage fixation needing our contribution, sudden replacement for TV/Refrigerator/washing machine etc. To meet out any such situation, we build up a fund separately by contributing small portions from our regular income flows in a planned way. The fund so made is called“Emergency Fund” .

Minimum – Maximum Amount of Emergency Fund:

Normal economic environment: 3 to 6 months of home expense*

Abnormal economic environment like recession: 9-12 months of home expense*

*Home Expense/Living Expense – refers to fixed expenses without which our life cannot go smoothly like kitchen or food exp., home loan EMI or rent (if living in loan based or rented house), EMI of any other loan if any, school fees of child/rent , day today needed travel exp., telephone, electricity & other utility bills exps. etc

Benefit of Emergency Fund:

  • It improves financial security as any emergency expenses as discussed above can be met out from emergency fund, leaving aside our other savings and investments intact meant for other life goals.
  • It reduces the need to draw from high interest debt options, such as [credit cards} or unsecured loans.
  • It gives us peace of mind in case of financial crisis, strengthening us to face the challenge in a better way. Since we remain calm & emotionally strong, we come out of crisis and ensure a better tomorrow

Where to maintain such Emergency Fund:

S. No. Avenue to Park Saving Bank Account Sweep-in Bank Account Fixed/Recurring Deposit Short Term Debt Funds Liquid Funds
1 Returns 4-6% 6-7% 5-7.60% 7-9% 6.5-7.5%
2 Good Part Easy Easy like saving account but better returns Easy to Open & Break Higher Returns Higher Returns
3 Not so Good Part Low Return Easy access can be a issue May require bank visit Money reaches in 1-2 Days Money reaches in 1 Day

Such fund can be maintained in any of the above mentioned avenue as per the requirement of person. However putting of such money may be preferred a “liquid fund” (where it can be availed in 24 hours time). It is because funds available in a saving bank account may be used in an impulsive hasty manner on getting a lucrative deal on a thing of our taste like clothing, consumer durable item like mobile phone, TV, Computer, Fridge or small trip with family for 1 - 3 days etc. and thus it may get spoiled. Apart from that it gives better returns from saving bank account & other avenues and is more tax efficient also for people in higher tax bracket.

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