In personal finance, retirement planning and investment are for planned goals and expenses. Investment for long term goal planning and grows by power of compounding. But in the event of unexpected job loss or if there is a sudden medical emergency, disturbing investment is not an best option. So we have to allocate money as emergency fund to manage unexpected circumstances. So Emergency fund is one of the critical components of financial planning.
How much to allocate for Emergency fund:
Every family should have minimum 6 times of monthly expenses as emergency fund. Maximum 12 months expenses as emergency funds. Do not hesitate to allocate 6 months expenses as emergency fund. Have emergency fund and internally you feel relax from your unknown worries.
Have emergency fund and internally you feel relax from your unknown worries.
One time allocation of emergency fund would be impossible. Start by allocating 10% of your monthly income into emergency funds. Once it reaches your 6 -9 months of your monthly basic expenses, just stream that 10% money into your investment.
Where to keep the emergency fund:
Emergency funds should be able to convert as cash within a day. One of the option to keep that in bank saving account. But bank account interest would be less and not the best. So keep the money in liquid mutual funds and short term debt funds. It would be easy to get cash from liquid and short term mutual fund. It becomes kind of investment as well as emergency fund.
Liquid funds :Liquid funds are one of the best places to put a part of your emergency fund. You may keep around 50% of your money in these funds. These funds are very liquid and you may get the amount if needed immediately or maximum within one day. These funds give around 7%-8% returns, which is better than savings account.
Ultra short term debt fund: Remaining 50% corpus can be invested in ultra short term debt fund which returns are better than a Fixed Deposit.
Do not think credit card would help in Emergency:
Indians commonly believe that credit card would help in emergency. Of course, credit card would help us in emergency. But think of that credit card is not accepted in hospital or credit card swipe machine is not working at hospital cash counter at emergency. Can’t even imagine the situation!!. Even if credit card works, we have to payback the credit card loans. Otherwise interest of 36% p.a for most of credit card. Avoid credit card traps by allocating money in emergency funds.
Of course, I agree that you have medical insurance. In emergency, better have emergency fund to avoid last minute rash if medical expenses crosses the coverage.
Do not ruin your professional career without emergency fund:
All of us hope for best in our life. No one expects loss of their beloved profession. In the event of unexpected job loss, emergency fund will help your finances until you get your next job. You be cool and search for better opportunities if you have money for your family 6 months expenses. If you do not have emergency fund, it will force you to settle in first job offer even it is below average. It would entirely turn your profession career to bad shape. I have seen many realtime witness of this scenario. Do not ever allow this situation to you.
You have to remember that emergency is to be used for an unexpected emergency expense and not for any lifestyle expense like a vacation plan or yearly shopping. Be safe..!! Start Emergency Funds.!!!