Have you ever faced a situation where your money got stuck in some investments, and you don’t have enough funds left to pay the next EMI? or unfortunately lost your source of income? Have you ever taken out your long-term investments to meet your expenses due to emergencies?
Regardless of yes or no, if you don’t have an emergency fund, it’s high time to create one because emergencies are unanticipated situations; we don’t have any control over these kinds of problems except to face them with a prior plan.
An emergency fund is a certain amount of money kept aside to deal with an unanticipated financial situation like a sharp spike in expenses due to medical emergencies or a financial crunch due to an unexpected job loss.
Let’s check out 5 essential parameters to consider while building your Emergency Fund.
Deciding the value of your Emergency Fund: As per the financial planning theory, an individual should have an emergency fund that will help them through financial distress for at least 6 months based on their income or expenses. We strongly suggest our readers create an emergency fund that matches your next 6 to 12 months of income, being 6 months as a minimum emergency fund one should have.
For example, if your income is ₹50,000/-, your Emergency Fund should range from ₹3,00,000/- to ₹6,00,000/- with Rs. 3 Lakh as a minimum requirement of corpus lying in the emergency fund.
Choosing the best avenues to accumulate your emergency fund: When you create an emergency fund locked for a certain number of years, it is of no use during an emergency; you should choose investment avenues to liquidate your assets quickly.
Some of the liquid avenues to help you accumulate your emergency corpus are as follows.
Less Frequently Used Savings Bank Account: The first and the best place to save your emergency fund is your less frequently used savings bank account. Using a spare bank account separates your emergency fund from your operational expenses and reduces the chances of spending up the emergency fund for regular payments or expenses.
Overnight Funds: Overnight Funds invest in debt assets that have a maturity in a day. These are considered the safest debt instruments with low cost and flexible holding duration.
Liquid Funds: Liquid Funds invest in debt assets with a short maturity period of up to 91 days. These are the next safest debt instruments to Overnight Funds and act as one of the best parking venues for an emergency fund.
Expected Returns: The returns expected from the above Overnight and Liquid funds are more or less similar to our savings account. We should not expect much returns from an emergency fund because creating this corpus itself is a goal. The goal of an emergency fund is to develop a sense of security in dealing with emergencies.
Redeeming your Emergency Fund: When we have a corpus of amount lying aside idle, you might tend to redeem and use it. So don’t assume your emergency fund as a corpus to fulfil your short term wants. Remember that having an emergency fund itself is a want or need to use this fund in emergencies like sudden medical emergencies during COVID 19 or a financial crunch during distress periods.
The Last Test: Once you create an emergency fund, ask yourself if you are fit for the financial emergencies in the coming 6 months at any point in time? If not, you should add more funds to your emergency corpus until you feel confident.
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This report is only for the information of our customers. Recommendations, opinions, or suggestions are given with the understanding that readers acting on this information assume all risks involved. The information provided herein is not to be construed as an offer to buy or sell securities of any kind. ATS and/or its group companies do not as assume any responsibility or liability resulting from the use of such information.