Emergency Fund
Emergency fund is saved money which a person keeps to handle emergency situations such as medical treatments expenses, monthly expenses in case of loss of job or failure of business or for any other critical financial situation.
What is the need of Emergency fund ?
As described above, this money is required to have a financial backup support in case of a person loses job.
How to save Emergency Fund ?
Most of the people make a common mistake, they don’t think about any emergency fund and start spending money on unnecessary items from very first salary and this habit continues for long. We must notice this point and not make this mistake. There are multiple ways to save money and keep emergency fund.
– Best way to save money for emergency fund is to start saving the money from very first salary earned.
– Start keeping a big portion of salary before starting any other investment.
– Whenever we get any extra money like annual bonus, variable pay or other ways, we must save that money as emergency fund.
How much money to keep as emergency fund ?
Before going into how much money to keep as emergency fund, let’s calculate the essentials, basic needs, EMIs, monthly medical expenses etc. For example, Person A need to pay rent of 15000, EMIs around 30,000, basic needs like groceries, electricity bills, water bills around 20,000, medical expenses around 5000. Totally monthly expense is 70,000. This amount is needed from worse to worst situation.
So with a thought keeping in mind (worse), one person should have enough money for 3 months minimum to 6 months or more . For person A, Emergency fund should be around 70000*3 = 210000 or on better and safer side upto 3.5 lakhs.
Where to keep Emergency Fund ?
Emergency fund has to be kept in handy manner, as any emergency situation appears, money should be available ASAP.
So one way is to keep it in savings account. There is another better option to keep it into Debt Fund or Liquid Mutual Fund. This type of mutual fund provides return equal as Fixed Deposits but one important benefit is this can be withdrawn at any moment and it takes max. 1 day to get money in your savings account. while FD doesn’t provide you full interest earned in the tenure if you break it in between.