Business Desk – Emergency Fund Tips: Emergency fund is a safe part of your savings which is kept aside especially for situations like job loss, sudden illness or any major crisis. Experts recommend that everyone should keep a backup fund equal to at least six months of essential expenses. This fund gives peace of mind and saves you from asking for financial help from others in difficult times or getting trapped in debt. The rule is simple. Prepare for your safety before trouble arises.
How much funds do you need?
Everyone’s needs are different. If you are single, your job is secure and you have no one dependent on you, then saving three months of expenses is enough. However, if you are married and have children, your responsibilities increase.
In such cases, you should have funds equal to six to nine months of expenses. At the same time, if there is some risk in your job or your business is unstable, then it is wise to keep aside an amount equal to at least 12 months of expenses to deal with any major crisis.
Where to keep this money so that it can be easily found?
The main objective of emergency fund is to get money immediately, not to get high returns. Therefore, it is very important to choose the right place to keep it.
- Savings Account: Keep here an amount equal to at least the initial three months’ expenses so that cash can be withdrawn from the ATM immediately.
- Fixed Deposit (FD): Short-term FDs with auto-renewal facility are best for this purpose. You can withdraw money within a day and also earn 5-6% interest.
- Liquid Mutual Fund: In these you can withdraw your money till the next day, and often they also provide the facility of instant withdrawal up to ₹ 50,000.
How to make a budget and what mistakes to avoid
To create a fund, first calculate your essential monthly expenses. Like ration, electricity bill, EMI and school fees. For example, if your monthly expenditure is Rs 1 lakh and your goal is Rs 12 lakh, then saving Rs 25,000 every month can help you reach that goal in two years.
Do not invest this money in such places which are difficult to convert into cash quickly. Secondly, do not make the mistake of considering the credit card as an emergency fund, because doing so increases the debt burden on you. Use this fund only for essential things, not for holidays or to fulfill hobbies.
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