An emergency fund is reserve money that you keep aside for emergencies. You can access this money at the hour of crisis and not for meeting your routine expenses.
A person from India said that five days before Diwali Festival a large and heavy tree fell on my house and it damaged my house. This was a bitter experience just before the favourite festival of my family.
Many of our neighbors asked us how we were able to handle those damages which need huge money immediately
The answer: Our Emergency Funds.
We were fortunate that we have emergency funds and due to that it was not a budget disaster.
What Is an Emergency Fund?
It is reserve money set aside to cover an unexpected financial emergency that comes in our life. These unexpected events can be stressful and costly. That’s why financial planners believe investors should keep aside 3-6 months of expenses in the fund.
Here are some of the top emergencies people faces:
- Job loss.
- Medical emergency.
- Unexpected home repairs.
- Natural Disaster.
- Unplanned travel expenses.
What if you don’t have Emergency Funds?
Suppose your monthly income is INR 50,000, then you must have an emergency fund of approx INR 1, 50,000.
Unfortunately, you met some financial emergency and if you don’t have an emergency fund then you have to take a loan.
Assume you took a loan of INR 1, 50,000 for 2 years at an interest of 15%. The monthly EMI of loan is INR 7273 and at the end, you had to pay excess money of INR 24,552 as interest.
Here you can see the details of Loan
What is the benefit of having emergency funds ready?
- The main purpose of the emergency fund to protect you from the budget disaster. It will also prevent you from taking high-interest debt to handle it.
- This fund gives you the confidence to tackle unexpected financial expenses without worries
- It also prevents you to borrow money from family or friends.
- These emergency situations come to anyone’s life
- You adopt a saving habit and it stops you from reckless spending
How much should you have in your emergency fund?
The size of your emergency fund depends on your lifestyle, monthly expense, monthly income, earning members and dependents. Financial planners believe investors should keep aside 3-6 months of expenses as an emergency fund.
Where should you keep your emergency savings?
Keep your emergency fund where it is safe or risk-free and easily accessible.
Equity2Commodity will guide you step by step on how to manage your Emergency Fund. This step-by-step guide gives you a complete idea of where to invest for the Emergency Fund and how much to invest?
I have a lot of other things that also need to be considered and those are something that I will cover in my next post.
I believe this Emergency Fund will surely help you to make money for the financial crisis.
If you want to add some other parameters that make this fund more profitable, then please comments below. Your views and suggestion are always welcome.