logo

What are Emergency Funds – Meaning and Definition

banner-img
author
verified
Gaurav Seth
20 Likes | 562 days ago

Like

Share

isVerifiedExpertAuthor is a Zfunds Verified Expert
author
Gaurav Seth
Gurugram
whatsapp

EMERGENCY FUNDS

WHAT ARE EMERGENCY FUNDS?

Emergency funds are money which you put aside for an emergency or uncertainty which may cross your path and need funds to do what needs to be done. Having this kind of fund gives the peace of mind and satisfaction to know that if something adverse happens, such as a big accident, losing your job, you can worry about how you are going to deal with that emergency and not about how the financial survival will take place.

There are few myths around emergency funds so lets sort them out before we go into deep understanding:

  • It does not have to be an unattainable, huge sum; It can start small.
  • It is not a set amount for everyone - it varies based on your lifestyle
  • It is not used for planned events like buying a house, college education, car and so on.

HOW HUGE EMERGENCY FUNDS SHOULD BE?

While an individual emergency fund will differ from situation to situation, most financial advisors and experts suggest that an apt emergency fund should contain between 3 to 10 months of monthly expenses. You may prefer a 5 month expense fund while your friend may go for 8 month. This is totally subjective and related to individuals. 

Nevertheless, you wont need to stress about saving 3 to 10 months salary or expense overnight. 

STARTING SMALL

Starting a small emergency fund of around one month is the first step to build a fully stocked emergency fund. This small goal is much more convenient and easier to reach and allows you to feel a sense of accomplishment once you reach this amazing milestone in your financial planning. 

After this, you can handle small emergencies in life without going back into debt. This permits us to focus on gaining momentum when it comes to money saving rather than switching back to focusing on paying off debts incurred due to small emergencies. 

NEED OF EMERGENCY FUND

So now the meaning of emergency fund is clear, let us answer the question which you all would be thinking of if you really need an emergency fund?

You might be of the opinion that your job is secure or you are in a high demand industry in which you can quickly find a new job. You may think that using a credit card might be a good option in emergencies because you can sometimes use it with 0% interest if you pay debt soon enough.

But unfortunately, everyone will likely face at least a few emergencies financially in their life. This can be due medical emergencies, child emergencies, losing of income, loss in investments among others.

As the saying goes, prevention is better than cure. So it is always good to have funds at your disposal rather than believing that nothing adverse will ever happen.

WHERE TO INVEST IN AN EMERGENCY FUND?

Once you people have accumulated your emergency funds, you should not leave it in bank or cash, at least not completely. Even though an emergency fund should be highly liquid, it is not something you can access very often. Hence, invest the funds in a manner that you can earn decent returns over it without compromising on the liquidity aspect. The ideal thing to do will be spreading the emergency funds across liquid funds, debt mutual funds, index funds and short term RDs.

For instance, suppose you have a fund amount of Rs 10,00,000 as your emergency fund. What you can do is keep Rs. 2 lakhs in cash at home, let Rs. 2 lakh stay in a savings bank account and invest the remaining Rs. 6 lakhs in a liquid fund. 

THE CRUX

In today's era, most individuals strive for financial independence at a younger age. They aspire to be able to retire in their forties and have all their financial needs taken care of. While this needs a very good amount of planning and strategy, it all starts with building an emergency fund that takes care of all unplanned emergencies and uncertainties of the future.

While this seems extravagant during normal times, in uncertainties and uninvited events like we witnessed the covid lockdown, it can be highly beneficial. If you have not started or are at the initial stage of building your emergency fund, you can anytime get in touch with our experts at ZFunds who will make your life easier and make your dream of financial independence come true.

 

Get Investment Advice from India's Top Experts