Hello everyone, welcome to today’s blog. Today I will highlight the importance of maintaining the emergency fund and deciding how much to be kept as emergency funds.
In this blog, we will answer all the following questions -What is an emergency fund?2. Why is an emergency fund necessary? Will it improve my financial situation?
3. How to determine the amount to be set aside as an Emergency Fund?
4. Where should you park your Emergency Fund? And exploring various instruments suitable to park emergency funds.
Let’s get started….!
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What are emergency funds?
The name sounds like the funds that can be used for any emergency right? Yes, you are right these are the funds that are set aside for any emergencies that may occur shortly that were not in your plan.
Why are they necessary?
Emergency funds are necessary cuz they help you avoid taking loans to fund any uncertain events you haven’t planned. Why shall I pay for the interest when I can maintain an emergency fund? Getting a debt will only make the situation worse in that case.Emergency funds do not add anything to your investment or wealth but they create a cushion that can absorb the financial uncertainties, so your financial health does not get damaged.
Always try to have an emergency fund and top up whenever you see a rise in your monthly expenses.
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How much money should I set aside as an emergency fund?
Depends on your monthly expenditure. It is always suggested to maintain an emergency fund that can fund your expenses for 6 to 12 months. This is so that in case you face a job loss you can utilize your emergency fund to handle your expenses until you get a new job.As time passes our spending also increases so you will have keep a track of your expenses and accordingly reallocate funds in your emergency fund.
Where should I park my emergency funds?
Liquid Fund. It is the best option to quickly convert your investments into cash. It would be better if you keep 70% of your emergency funds in liquid funds and 30% in your bank account so you have a little bit at the time of emergency.Or else, if you have decided to keep your emergency funds invested completely into liquid funds then that is also okay, you can pay for your emergency with your credit cards without crossing the limit of the card and instantly withdraw from the fund to pay your credit card balance to avoid the hefty interest.
Also, remember that we are not investing these funds in liquid funds to yield returns, but instead, we are doing it so that our fund does not lose its value to inflation. Doing this we ensure that our emergency fund is keeping up with the inflation.
