Keeping money aside to face your emergencies is important. We all do have a situation where we need money – it can be a medical emergency, sudden job loss, disability or certain health issues which may stop you from earning. One should be very clear on the statement that – Your emergency funds cannot become your savings whereas your savings can be your emergency fund. Your savings and emergency funds are not the same. They are two different things. These two are differentiated based on an individual’s planned and unplanned expenses. Generally, savings are made to meet one’s planned expenses.
For example: Think about buying a car, where you will pull all your savings, take a loan or you borrow from your relatives or friends. These are events you can prepare and plan for. Then what about unplanned expenses? Sudden job loss, huge medical expenses, health issues that stop you from earning all these can be one’s unplanned expenses. This is why we create an Emergency Fund.
Savings and emergency funds are two different categories. Savings provide you the financial freedom to make an investment which can be for a short or a long term and helps you meet your financial needs. Whereas emergency fund provides you the financial security by assisting you in financial crisis.
How much you need for an Emergency Fund?
Roughly keep aside six months of your living expenses including your EMI, rent and school fee. You can increase or decrease this figure based on your personal situations. Say you have decided to have an emergency fund of Rs.1 lakh, in this case, you can put aside money of Rs 5,000 or Rs 10,000 every month. On being more specific:
- If you and your spouse both are working and have no dependents, in such cases, 3 months of your living expenses can be kept aside for an emergency fund.
- If you are a sole bread earner of in your family and you have many dependents then one year of your living expenses can be kept aside for an emergency fund.
- If you are risk-averse, then you can keep a year’s expense like an emergency fund.
Where you keep this money?
The money which you keep aside i.e., an emergency fund cannot be kept idle. So you can move these funds to a place where the accessibility is less and liquidity is high and offers better returns than a savings account. Accessibility is less because more often you cannot take out the money unless its an emergency.
Fixed deposits can be an easy option. Certain banks offer flexible FD’s that will allow you to sweep the money that you need without any additional charges. Hence you can go for it.
Another popular investment option is – “The Mutual Funds”. You can go for short- term debt funds to build an emergency fund. These debt funds offer you a better return when compared with FD’s. These debt funds are more flexible and the incident of tax is very less comparatively.
Therefore, set yourself a target and plan accordingly. Make a regular monthly credit towards your emergency funds. Hence be prepared for uncertainties of tomorrow. If you don’t have anything saved towards an Emergency Fund, it is not too late to get started. So, start with MyWay Wealth.
The little you put, the more you can do!