Need of Emergency funds.

Amit Deshwal
2 min readJun 20, 2021

--

To understand the emergency funds better let’s try to answer few questions like,

  1. What are emergency funds?
  2. How much emergency funds do we need?
  3. Where to park our emergency funds?

Q1. What are emergency funds?

  • Emergency funds are funds that should only be used in some emergencies like you lost a job or any unexpected event happened.

What kind of emergencies doesn’t fall under emergency funds?

  • Health Emergency — should be covered by health insurance.
  • Sudden loss of death — should be covered by term insurance.

Q2. How much emergency funds do we need?

  • To calculate the amount,

1. First, calculate your monthly expenses.

2. Multiply it by no. of months.

  • At a minimum, we should have an emergency fund for the next 3 months & there is no limit for the maximum months because it depends from person to person(ideally it should be for 12–18 months).
  • eg. If my fixed monthly expense is 40k, then I should have at least 1,20,000Rs(40k*3months) in my emergency funds.

Q.3 Where to park our emergency funds?

  • Our emergency funds should be always liquid i.e we should be able to use them at any moment.
  • The best liquid instruments are Cash, Fixed Deposit, Savings Account.
  • You should keep 25% cash & the rest can be kept in a Savings account/Fixed Deposit.
  • We shouldn’t keep our funds in debt liquid funds because we will have to wait for 1 or 2 days until we get our amount.
  • We shouldn’t invest them in stocks, mutual funds, etc. because these instruments are not stable.

Always remember — Emergency funds are not to generate returns but for emergencies.

--

--