Why You Need An Emergency Fund And How To Invest In It?

The backbone of sound financial planning is saving money and making provisions for unexpected expenses for the future. In this post, we have discussed the need for an Emergency Fund.

You need to set aside some money as an "emergency fund" to use in times of need. A rainy-day fund is a savings account kept aside for use in times of emergency or other unanticipated situations rather than to pay for everyday living costs. Because of this, you must tailor the plan to address any potential financial deficits.

Why You Should Always Have a Liquid Emergency Fund

When deciding where to store your emergency fund, its liquidity is the most important factor to bear in mind so that you can pay for any unanticipated costs. The capital invested should not depreciate and should provide high returns. The funds should be available for withdrawal without any hassle or delay on your part. You must also watch out for exit loads and early withdrawal fees.

How to Start Saving for the Unexpected

Accumulating a rainy-day fund is a process, not a feat, to be accomplished in a single night. Put money away regularly, in a set amount. Rapid expansion means you can have it all very soon. Let's say you've settled on Rs.1 lakh (around $1,250) to set aside for unexpected expenses. For this purpose, it is possible to save the required sum by putting away Rs. 5,000 or Rs.10,000 per month. Reducing your investing contributions may be necessary to reach this goal.

How much money should you set aside in an emergency fund?

You should have at least three to six months of your monthly salary stashed up in case of an emergency. If you make Rs.30,000 per month and spend Rs.15,000 on essential living costs, you should have between Rs.60,000 and Rs.1,00,000.

It's up to you to decide how to allocate your emergency savings.

Financial reserves available for the long term

This is where you put money aside in case of a catastrophic event, such as a natural disaster or an unexpected illness. You should put this money into securities with a higher interest rate, but it can't be cashed out for a few days.

Quick money for a tight spot

You should use this account for any sudden financial needs. A low-interest savings account is fine for this purpose because it can be used quickly in an emergency but won't be able to replace your long-term emergency savings until they are accessible.

Manage Accessibility

After saving up an emergency fund, you should keep only some of it in liquid assets like cash or a bank account. An emergency fund should be liquid, but you should only tap into it if absolutely necessary. Hence, invest money such that you may generate acceptable returns on it without jeopardizing its accessibility. Diversifying the emergency fund amongst liquid funds, short-term RDs, and debt mutual funds is recommended.