Need of Emergency funds.
2 min readJun 20, 2021
To understand the emergency funds better let’s try to answer few questions like,
- What are emergency funds?
- How much emergency funds do we need?
- 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.