The Covid Pandemic has taught us that an Emergency can strike at any point of time, and we just are rendered helpless if we are not prepared for the hour. Just like Natural calamities like Floods, Earthquakes keep you away from work, similarly, an Economic shutdown causes job layoffs and salary cuts. The cause of the Emergency is not in our hands, but whether or not to be prepared for it is very much in our hands.
What is an Emergency Fund?
An emergency fund is necessary corpus money that you must keep aside to fight back during crises and emergencies. It is the money with which you can survive during unplanned scenarios and conditions, specifically to cater to financial shortfalls, that comes in your life.
Building an Emergency Fund
Before we go on to the building blocks, you should know this fact that the most important factor of an Emergency fund is its liquidity. By liquidity, we mean, how fast are you able to withdraw the money when required without much delay. Also, it should contain unnecessary penalties or exit loads.
An emergency fund is not built overnight but slowly and steadily. Try to set aside a particular amount in your bank account. Very soon, it will grow into a considerable corpus. If you don’t wish to accumulate the corpus first, then you can even go for the SIP (Systematic Investment Plans) scheme which enables you to deposit money every month in a fund.
How much Emergency Fund is Required Normally?
Depending fairly on income & lifestyle, an Emergency Fund fairly should cater to Four to Six months of your Monthly Salary.
What is a Smart Way of Maintaining your Emergency Fund?
Once you start building your Emergency Fund, don’t let it rot in a savings bank account. Even though the Emergency Fund should be Liquid, with interest rates of 2.5%-3% per annum, your money will be decreasing its purchasing power with time. The ideal way to do this would be to spread your emergency fund across Debt Funds, Liquid Funds & Short-Term Recurring Deposits.
For Example; If you have Rs. 100000 as an emergency fund, then keep about 20-25 thousand in your savings bank account, 20-25 thousand in short-term Recurring Deposits & the remaining Amount in Liquid Funds.
Liquid funds are highly liquid in nature and have earned returns up to 8% per annum over the years.
Most liquid funds allow an instant or One day redemption time period of up to Rs 50000 or 90% of the money you had invested. Your money gets credited to your bank account linked with the fund. Check about the redemption facility and period before investing in a liquid fund.
In this way, by spreading into different avenues, you can be assured of higher returns as well as quick accessibility.