Emergency Fund – How to Save and Where To Invest | My Money Sage
Emergency Fund: Methods To Save
Very few people think about putting money aside to deal with an emergency. Most of us are not prepared to face a crisis, because we feel that something like this will never happen to us.
The following story will help you to understand the importance of creating an emergency fund:
Mr. Gupta’s 4-year-old son’s finger was almost cut off in an accident. He rushed to a private hospital, where the doctors said that emergency surgery was necessary to save his child’s finger.
He did not have medical insurance, so the hospital asked him to deposit Rs.50,000 immediately. There was not enough money in his bank account. He did not have any family members or friends in the city.
Mr. Gupta was distraught and didn’t know what to do. His coworkers heard about his plight and provided a loan to pay for the surgery. The surgery was successful, and the doctors were able to save the child’s finger.
That’s why every financial plan must include an emergency fund, which is money set aside to prepare for any unexpected crisis. A cash reserve can help you to pay for any unexpected expenses. It can help you to get through a sudden job loss or reduction in income.
An emergency can occur without any warning and upset your financial plans. We cannot predict a crisis before it happens, so it’s essential to prepare and set up an emergency fund without delay.
If you have an emergency fund, you will not have to borrow money from your family members, friends, or coworkers. There will be no need to dip into your long-term savings, which can impact your long-term goals.
Let’s take a closer look at what an emergency fund is and how you can create one:
What is an emergency fund?
An emergency fund is a sum of money that is held in reserve to deal with emergencies. It is kept separate from funds used to meet daily expenses and is not a part of long-term savings. The fund must be liquid so it can be accessed quickly at any time without any exit load.
Emergency funds need to be kept in liquid instruments which are safe and not volatile. Your emergency fund should provide adequate returns, which will ensure that it will keep growing. You can choose liquid investments that suit you.
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How much money should you keep in your emergency fund?
You can create an emergency fund that covers your living expenses for 3 to 6 months. For example, if your monthly household expense is around 20,000, you can keep 120,000 in an emergency fund.
If you have an irregular income, you may need a larger emergency fund. A more substantial amount may be necessary if there are sick or aged family members who may need medical assistance. However, if you keep a big amount in liquid investments, you will miss out on returns.
How to create an emergency fund
Once you have decided on the size of your emergency fund, put aside a small amount every month until you reach your target amount. For example, you can invest Rs.5,000 or Rs.10,000 every month in a separate savings bank account.
You can reduce your long-term investments while you are creating your emergency fund. Instead of starting a new systematic investment plan (SIP) in an equity mutual fund, open a recurring deposit bank account or start a SIP in a liquid fund. Regular investments will help you to build an emergency fund gradually.Learn how to mange your money & create wealth, Download your FREE eBook now
Where should I invest my emergency funds?
Split your emergency funds between cash, a separate savings bank account, and a liquid mutual fund. You can keep a certain amount of money at home, but this involves the risk of theft, and you will not earn any interest on it.
You can keep some money in a separate savings bank account, which will provide an interest rate of around 4%. The rest can be in a liquid mutual fund, which will provide a higher return of about 7%.
For example, if you want to create an emergency fund of Rs.120,000, you could keep Rs.20,000 in cash, Rs.40,000 in a savings account, and Rs. 60,000 in a liquid fund.
How to access your emergency fund
You can keep some money at home to prepare for emergencies. However, it’s unsafe to have too much cash at home. Funds held in a savings bank account can be easily accessed using a debit card. Your debit card will allow you to get money at any time of the day or night through ATMs or point-of-sale (POS) machines.
You can access money invested in a liquid fund quickly without having to pay any exit load. You may be able you to withdraw up to 50,000 or 90% of the investment instantly through any mutual fund’s app like Mymoneysage.in. The money will move to your bank account at once. In any case, you will be able to access your money within one working day.
Most of us have heard of emergencies faced by others, but we think it’s unlikely to happen to us. Emergencies occur suddenly, and most of us are not prepared to meet them. It’s essential to create an emergency fund that covers your household expenses for around 3 to 6 months. You can split the money between cash, a separate savings bank account, and a liquid mutual fund.
It’s never too late, to create an emergency fund, all you have to do is open a free mymoneysage account, and start investing in direct plans of liquid funds.