Wednesday, September 12, 2018

How emergency fund can help you to live better financial life. - Financially Pro

Try to remember a day when you were in urgent need of money like urgent medical treatment and you didn't get! 
Had to ask for money from people you shouldn't.
Did you feel disappointed?
If yes then you should now think about an Emergency Fund.

If you didn't face this kind of situation then you are lucky, learn from others experience and start building Emergency fund.

Start Thinking about an Emergency fund

It is money kept aside to deal with the urgent situation for a temporary purpose.
Most people think they don't need an emergency fund or they'll manage somehow.

But believe me, when you face such situation you won't be able to manage.

You'll be very tension free if you have enough emergency fund. It'll help you only in crisis but without any urgency it will give you financial peace.

Let me give a real-life example

One of my relative was urgently admitted to hospital and surgery was required. As surgery was on the same day, cashless insurance claim would take time, so money was needed to be deposited. 
Although he had cashless insurance, still he was not able to use that because insurance claim would take 3 to 4 hour to pass and surgery was required to be done immediately.

Here an emergency fund can help you a lot.

According to financial experts
An emergency fund is even more important to build before buying life and health insurance.

Still, why most people don't have an emergency fund?
  • Build it and use somewhere else
  • Have an undisciplined approach towards saving

How much to save for Emergency fund?

According to financial advisors, you should have 3 to 6 month of your net income after tax.
But that's just thumb-rule I.e. according to general principles.

So what suits you?

If you have health insurance you won't need money for health issues.
( In an example I gave emergency fund was needed even he had insurance )

If you have more dependent, a high amount will be required to accumulate.

You need this much amount for an emergency fund.👇

Add all your necessary monthly expenses 
Now calculate your monthly fixed liabilities like home EMI, car EMI, insurance premium etc.

No one knows better than you!
You only know that by how much money your home and other expenses can be fulfilled. 
So, now as you know expenses required monthly, question is about to build emergency fund for how many months?

Experts says that is you are businessman then you should have 6 months of expenses set aside. If you doing job then it is 3 months.

This is not something where you can say that this amount is perfect.
It is an art not science.
So you need to decide by yourself what amount you need to build.

You can keep aside fixed amount of money till you build good amount as emergency fund.

Major doubt! Where to invest?

Before understanding where to invest let's make it more clear where not to invest.

  • Where risk is high and chances of             losing principal amount too.
  • Where exit load is charged. (When you sell investment, charges needs to be paid for exit.)

You just can invest all your emergency fund. You need to keep some amount in cash or bank.

You should keep minimum 25% of your fund in bank account so that you can withdraw anytime through debit card. Here debit card is important as if you need money when bank is closed, you'll be in trouble. Also increase withdrawing limit of your card.

You should keep your remaining amount of money in highly liquid fund (high liquid fund are funds where you can move.out of it easily). Where you don't have risk of losing your money and also get good return. So that inflation will not be barrier.

Don't ever go with equity fund for emergrncy fund. You need to go with debt fund only where investment in in debenture,. commercial papers, government bonds, secured debts etc.
Here investment is not for purpose of return but security.
Many mutual fund have given 8%to9% return in liquid funds which is good enough.

Note the terms and conditions before investing that there is no exit charges for selling your fund. Otherwise at the time of an emergency you'll have less money.

Try not to use your emergency fund for any other purpose like preparing home loan, car loan etc

Major mistake made by people is that they spend this fund on unnecessary expenses. Try to avoid such habits.

So, hope you understood about emergency fund.

Any other doubt regarding personal finance?
Feel free to comment.

Share this post with your near and dear so that they also start building their emergency fund.

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