An emergency fund is an important part of financial security in case of a crisis like job loss or medical expenses. This should have an amount equal to 3 to 6 months’ expenses. It is better to keep this fund in a separate savings account from where the money can be easily withdrawn.
New Delhi: Whenever we do financial planning for the future, all our focus is on investments and retirement funds. But there is one more thing which is equally important – and that is emergency fund. Imagine if your car suddenly breaks down, you incur some medical expenses or you lose your job. In such difficult times, this fund helps you handle the situation without borrowing from anyone. Its biggest advantage is that during times of crisis, you can manage your daily expenses without any tension.
How much emergency fund should you have?
Generally, experts say that you should have at least 3 to 6 months of expenses in your emergency fund. But if you are a freelancer, your income is not fixed, or someone at home is sick or someone is dependent on you, then it is better for you to have a fund equal to 6 to 12 months of expenses.
How to calculate?
First of all, make a list of what important things you have to spend on every month. This should include:
- Loan EMI and other installments
- electricity, water, internet bills
- Household food and other daily expenses
- Insurance premiums
- children’s school fees
- Travel expenses
Add up all these expenses. Now multiply this total amount by 3 to 6. Your emergency fund should be the same amount that comes in. As mentioned earlier, if your income is not regular, then calculate it by multiplying it by 6 to 12.
how to start?
Emergency fund is not ready in one go. You can start with small amounts. For example, if your monthly expenditure is Rs 25,000, your target for 6 months will be Rs 1.5 lakh. You can also start by saving Rs 500 to Rs 1,000 every month. Whenever any bonus, tax refund or extra money comes from somewhere, it can be a good decision to put it in this fund.
Where to keep the money?
Emergency fund should be kept in such a place from where you can withdraw it easily and quickly. But don’t keep it in your daily expense account. The best way for this is to open a separate savings account.