Emergency Fund: Along with savings and investment, it is important to have an emergency fund, understand the whole thing to avoid problems.
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emergency fund: It is said that troubles in life never come without warning. But when it comes, your only support is your family and your money. In such a situation, it is as important to save and invest in life as it is to earn. Along with this, it is also important to create an emergency fund. An emergency fund is not meant to meet your monthly needs. Rather, it is a means to get you out in times of trouble. In such a situation, the emergency fund should be liquid. This is its most important requirement, from which you can easily remove it at the time of need. There should not be any exit load or pre-withdrawal penalty for withdrawals from the investment portfolio or account. While creating an emergency fund, it should be kept in mind that there should not be less money in it, at the same time, the returns should also be decent.
How to create an emergency fund
Emergency fund cannot be created overnight, but has to be created gradually. Set aside a specific amount of money every month in a separate bank account. Soon, this will grow into a large fund that you can tap into in times of need. Suppose, you have decided to create an emergency fund of Rs 1 lakh. In this case, you can set aside Rs 5,000 or Rs 10,000 every month to accumulate your required amount of money. However, it is okay to cut your investments to make this amount. That is, to create an emergency fund, select only such an amount which will not affect your monthly expenses. Now the question is, how much money should you have in your emergency fund? Depending on your income and expenses, an emergency fund can last three to six months. For example, if you earn Rs 30,000 per month and Rs 15,000 of that goes towards meeting your regular living expenses, then your emergency fund should be between Rs 60,000 to Rs 1,00,000.
Create two types of funds
Create an emergency fund in two ways. Create a fund, one to meet your short term needs and the other for the long term. Long-term emergency funds are necessary for large-scale emergencies, such as a major natural disaster or sudden medical emergency. This fund should be invested in instruments that allow you to earn slightly higher interest rates. The money in short term emergency fund may be less, but it should be immediately accessible. Well, don’t worry about high interest on this money. Many times, short term emergency funds are of great help in handling the situation when there is a delay in accessing the long term emergency fund.
Where to invest in emergency fund
Once you have accumulated an emergency fund, you should not leave it in cash or a bank account. At least not completely. Even though an emergency fund should be liquid, it’s not something you can access often. Therefore, invest it in such a way that you can earn good returns from it without compromising on liquidity. The ideal thing would be to keep the emergency fund in the form of liquid funds, short-term RDs and debt mutual funds. Suppose you have Rs 1 lakh deposited as an emergency fund. Now what you can do is keep Rs 20,000 in cash at home, keep Rs 20,000 in your savings bank account and invest the remaining Rs 60,000 in liquid mutual funds. With this your money will also start giving some returns.
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