Emergency funds : why they are important

Just like their name, Emergency funds are for emergency, dilemma say say loss of job, sudden big expenses. in perfect language of investment, the nature of such expenses are Unusual and Infrequent. you may call them UNPLANNED MANDATORY EXPENDITURE . It may not be best example but money kept in Govt securities by industrialist and used in case if interest rates are up suddenly is one example. we saw such situation in some cases in India when after 2008 crisis, interest rates in India went high, many companies started for bankruptcy. it is like cushion against difficult situation. Different example maybe but generally emergency funds are their on personal finance to avoid taking debt having high interest rates.

After my talk with many individuals for study or general, many are ignoring this or not keeping it in right amount.

Image : economic times

Why you need to keep such Special Fund?

While studying for this blogpost, I realize that many US citizen are living from paycheck to paycheck. Why in US, Maybe situation is same in India also. In such situation one extra expense may make or Break you.  We all are aware that there is always possibility for sudden change, sudden need of money. It could be anything. as small as car expenditure to as large as accident and operation. Yes there is always insurance but what i saw that some time it is not covered. or maybe you ignored it. Like Dengue. Not many Insurance companies selling cover for it in India. so?

In such times, you can not sell your investment or use funds from retirement. It also need easy access. in such cases Earning return on such type of funds is not primary goal. Keeping money easily accessible is important. How big or large is the size? Between three to six months’ worth of living expenses is the ideal size of emergency funds.

Where to keep it?

At least in India, there are some funds like Reliance money management which can give you money in your bank account in less than five minute. You can withdraw it from Bank account. In fact special Savings bank account  kept aside for this is very good for emergency fund.

How to raise money for this?  Financial experts generally recommend putting away 20% of each paycheck every month. In my personal view, 15% is also right. In fact some experts recommend second job, selling things which you don’t need in your house. Garage sale. though I am not from US But I love the concept. They can take care of many problems. In fact Amazon is also keeping similar facility if I am not wrong. OK. Recently listen about eBay also.

Checking account in US maybe right option. In India, payment bank like PayTM, Airtel Payment bank right option. money market funds having good liquidity is also one.

stop eating out for some time or try minimize spending without plan. I don’t need to explain it.

I am going to end this chapter with some Myths about it.

Put as much money as possible in emergency funds. No. No need for that. Amount equivalent for six month expenditure is sufficient. But which six months?

Future six months. if you are planing to buy car or some vehicle or you are getting married. How can you expect that your expenditure will be same? Its your responsibility to take care it.

Don’t include your expenditure on luxuries like Eating out shopping. Utility bills, fuel Expenditure so that in case if you loose job, for getting another you need to spend. emergency fund will take care about it.

Putting Emergency fund in investments. good idea. But say you are hospitalize and need operation immediately. How much time it will take to sell your investments? Market crash may affect your emergency funds. Then?

Using retirement funds for emergency funds. I will call it financial suicide. Why use your funds which you are making for your retirement. Do you know what type of difficult situation in future are waiting for you?

Avoid using Emergency funds. Once again. suicide. emergency funds are their for use and refile. Don’t play with them and don’t do any experiment with them.

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About Ashutosh Tilak

Tracking Indian Capital Market since 2010. Finance Student, On this blog I am writing about finance and Investing. You can contact me analystashu@gmail.com or @androidashu & @InsideFinanc on twitter