Emergency Fund – A Friend in Need
My friend lost a job. I know he will get his job eventually, but the good thing is that he was saving for his rainy days. And for the time period he will not be working, he can meet his needs from that fund.
Life is extremely uncertain. One day it gives us all the happiness in world and one day we are in deep trouble. To keep us emotionally strong in testing waters, Emergency fund is extremely important. Let’s understand its true purpose. If we have saved for emergencies/contingencies in life, then there is no need for us to fret about our monthly expenditure, which will be there in whatever situation we are in.
Now the next question arises. How much of emergency fund is enough? We are in some situation, and we don’t know for how long that situation will continue. Normally one should have 6 months expenses for this fund. And if your house expenses are variable in nature, you can always target for 6 months’ salary. This gives us enough buffer and we can focus on making our situation better.
Where should we save this money? Definitely not CASH AT HOME. Keeping money at home is making that money easily accessible for any purpose, and we tend to spend it for all other things other than emergencies plus it will not give us any return. You also cannot put that money in Stock Market, which is extremely volatile in nature. What will happen if you need the money and markets are down, and your savings are in negative numbers? Emergency fund is not for investing in risky instruments. And you should also not put this money in instruments with lock-in period like – Insurance, PPF. You can keep this money at your Bank in sweep-in account or even in Cash mutual funds which provides you enough liquidity to take the money out when needed.
Charu Hastir, CFPCM is founder member of www.theriteplan.com. Rite plan is an online financial planning portal created to achieve a single objective of providing easy and Do It Yourself Financial Planning to netizens. Rite Plan is wholly owned by Tikkun Olam Financial Planning Services LLP. Please visit: https://theriteplan.com/index.php?route=common/home/