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The survey revealed 75% of Indians do not have emergency funds and could default on their equated monthly instalments (EMIs) in the event of a sudden layoff. ” Indians consider their parents ‘friends as an emergency fund. One out of three neither has health cover, nor an emergency fund, said the survey. Another striking data point which further necessitates an emergency fund is this: At least 29 per cent of Indians said their salary does not last beyond 15 days!
“The primary objective of maintaining an emergency fund is to create a financial corpus for dealing with unforeseen expenses or for covering unavoidable expenses during periods of income loss caused by job loss, illnesses or disability. Without an adequate emergency fund in place, one would be forced to liquidate his investments earmarked for crucial financial goals or avail loans at much higher interest rates to deal with such financial exigencies,” said Naveen Kukreja, Co-Founder & CEO, Paisabazaar.
How big should an emergency fund be?
Most thumb rules related to emergency fund planning state that you must have six–nine months of your fixed monthly expenses saved away in an easily accessible and low-risk asset class. However, your unique situation may require a sum that is even higher than this. “For instance – one who has just launched a venture of their own may need to have 2-3 times this amount saved up in an emergency fund, compared to someone with a stable income and a high reserve-surplus ratio, for whom even 3 months’ worth may suffice,” explained Aniruddha Bose, Chief Business Officer, FinEdge.
You may also adjust the quantum of your contingency fund based on your changing financial obligations. ” If you have taken a loan, increase your contingency fund accordingly to cover loan repayments. Once you have repaid the loan, decrease the size of the fund. Avoid parking your contingency fund in instruments which don’t offer easy liquidity or have a lock-in requirement,” said Adhil Shetty, CEO of BankBazaar.
CA Jay Desai lists down some steps to get started:
Set a Target: Determine how much you need in your emergency fund. This amount can cover unforeseen situations like a medical emergency, sudden loss of income, urgent home repairs, and so forth.
Budget for It: Include your emergency fund as a line item in your monthly budget, just like rent or groceries. It’s a non-negotiable expense for your future self.
Where to invest?
Savings Account: A regular savings account is a great place to keep your emergency fund. It provides instant access to your money. Opt for a high-interest savings account to earn a little on your savings.
Liquid Funds: Liquid mutual funds are another option. They offer higher returns than a savings account and are relatively low-risk. You can usually withdraw money within a day. These funds invest in high-quality short-term credit funds. Such funds are only permitted to invest in listed commercial paper, and a maximum of 25% of their total assets may be allocated to any one industry. They are not allowed to invest in assets with a high level of risk.
Keeping money aside doesn’t mean just save in your bank account:
Avoid equity mutual funds
Don’t chase returns on the fund
One should always avoid withdrawing from the emergency fund for non-emergency needs like the hot investment of the week or a once-in-a-lifetime vacation.” Ajinkya Kulkarni, Co-Founder and CEO, Wint Wealth.
“Under this facility, a savings or current account with overdraft facility is opened and linked to the home loan account. The borrower can park his emergency fund along with other short-term surpluses in the overdraft account and withdraw from it as per his requirements. The home loan interest cost for the borrower woul d be calculated after deducting the amount deposited in the savings/current account from the outstanding home loan amount. Thus, the overdraft account would allow home loan borrowers to derive the benefit of making prepayments while allowing them to make withdrawals from this account to deal with unforeseen financial exigencies,” said Paisabazaar’s Kukreja.
Don’t forget the medical cover
Alongside having a solid emergency fund in place, it’s also important to have a high-quality medical cover for your family. More often than not, it’s medical emergencies that leave a huge dent in our goal-based savings, and a good health insurance plan can safeguard you from that.
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