Importance of Maintaining an Emergency Fund

The coronavirus crisis has shown us the importance of having an emergency fund set up as it comes in handy whenever any unexpected crisis arises. The lockdown measures which were announced by many governments globally had forced many people to stay out of work for many days.

These testing times have indeed shown us that there is a need to set up an emergency fund to overcome a situation like a health emergency or a job loss or an accident and so on which will lead to loss of income.

Importance of Maintaining an Emergency Fund

If one has an adequate emergency fund in place, then the trauma of going through the financial struggle can be avoided. Before starting the financial journey, one needs to address basic protection needs. This can be done by picking up an adequate insurance plan and also by building an emergency corpus.

Most of the financial advisors do suggest their clients keep aside a sum of money at least 6 - 12 months monthly salary in liquid position. If you have a loan then do take the EMI amount also into consideration before setting up an emergency corpus.

What is an Emergency Fund?

The term emergency fund refers to the fund which one should keep aside to tackle uncertain events in their life. It must be designed to meet any kind of uncertain and unanticipated financial shortfalls arising in one's life.

These funds should be immediately available (liquidity) and must be safe of capital. Though these funds should be liquid, it is not something which is always required and hence it should be parked in investment in such a way that it should earn some decent returns without compromising on liquidity.

What is an Emergency Fund?

For Example

Bank Savings Account, emergency funds can be kept safely in any of the bank's savings account and it can be withdrawn easily at the time of need and it also fetches some minimal interest on the deposited amount adding on some value to the principal deposited amount.

Apart from this liquid funds and fixed deposits offered by banks and financial institutions can also be opted for parking your emergency funds safely.

If an individual falls under a high tax bracket, then they can choose to park their funds in a combination of bank fixed deposits and liquid funds based on the size of emergency funds and liquidity requirements.

How much should you save in an Emergency Fund?

One should assess the situation to ascertain the right size of the emergency fund. If you are a bachelor, then three months salary will be sufficient for survival. If you are married without children then ideally 6 months salary worth of emergency fund should be built.

If in case, you are married with children when ideally more than 12 months salary should be parked in your emergency fund to wade easily through any windfall situation if it occurs.

How much should you save in an Emergency Fund?

If you still do not have an emergency fund in place, then start with a recurring deposit and build an emergency fund based you and your family's requirement.

Having an emergency fund in place will give you the much-needed peace of mind as you will evade going through financially tough times. But creating an emergency fund is not the end of the road, one needs to evaluate it regularly and keep reviewing it the way you review your financial plan.

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