When you start searching where to invest your hard earned money you come across various options ranging from mutual funds to shares ,FDs to real estate.But we always forgot the very first step of investing -The Emergency Fund.
What is an Emergency Fund ?
An emergency fund is nothing but a account where you set aside funds which you can use in the event of financial emergency.
Suppose you are working hard for your company but one fine day your HR manager tells you that recession is going on and you are no longer an asset to us .Suddenly,you are jobless and god knows when the next job will come by. Meanwhile,the bills arrive relentlessly. What do you do?
The purpose of the fund is to improve financial security by creating a safety net of funds that can be used to meet emergency expenses.
In life you should expect the unexpected, and this is why you need an emergency fund. The best you can do is to prepare for emergencies that require access to additional money and having an emergency fund is the ideal solution.
How well you handle the emergencies in your life are often dependent on how well prepared you are financially.
Setting Up An Emergency Fund
Step 1 Decide how much amount you should save
Most experts agree that you should keep between three and six months worth of your living expenses in your emergency fund.
Calculate your average monthly expenses and multiply that figure by 6.,that is the number you should save.
Step 2 Where to save
The key to an emergency fund is accessibility.
Most of us trust saving bank accounts for all our savings.You can earn interest from it but you are losing value due to the effects of inflation but this is not a priority for your emergency fund.
Consider placing your emergency fund into a Ultra Short-term debt fund or other debt mutual funds with a good track record.
You can withdraw quickly from Ultra Short-term debt funds, these can provide a good option to park your emergency fund. These also generally give better returns than savings banks accounts interest (8-9% debt funds compared to 3-4% savings bank account).
You can also consider equity products as it helps you grow your wealth over the long term but due to market volatility and risk associated with it ,this route was not advisable to use it as emergency fund.
If you don’t feel comfortable placing your money in mutual funds you can continue to use savings account. The bottom line is you want to be able to access your emergency fund quickly when you need IT.
Step 3 How to save
The most effective way to save for your emergency fund is by setting up automatic withdrawal from your parent account.
When setting up an emergency fund, you should consider opening up a separate account so that you can differentiate and manage it easily,if not then there is much more probability that you can use that fund on non emergency situations.
Keep topping up your fund till you reach your target corpus that can cover 3-6 months of your expenses.
Having an emergency fund always helpful in various financial emergencies without affecting other accounts or forcing you into debt. It’s the best tool to help you build financial security.