Emergency fund is your extra savings but not your investment. Therefore, it should be treated in a different way.
Maintaining and saving money as an emergency fund is necessary for all those earning individuals who have dependents upon them. Also, the amount they save should be secured in such a way that it can be accessed quickly to meet any sudden demand like paying household expenses bills, hospital bills, children's tuition fees, etc.
However, while taking the initiative to start saving money as an emergency fund, the first step is to understand how much funds are available with you, in what form, and how they can be accessed. It is essential that one plans their finances so that they understand all these aspects well in advance and are not constrained to learn of them when there is a crisis. Maintaining an emergency fund should not be linked to your financial goals. You should understand that it is your extra savings but not your investment. Therefore, it should be treated in a different way.
How much should you save for emergency need?
In normal times, one should be keeping at least 3-6 months of their expenses as their emergency fund. One can even save more monies because as one’s expenses increase, one needs to maintain the same proportion at every interval of time. But then, one should not ideally over exceed these savings amount as one should also grow their money to achieve one’s financial goal too.
“There is no specific amount that should be saved for an emergency fund or a contingency fund. The amount of the emergency fund depends on your personal need and your family circumstances after taking into consideration your average essential monthly expenses, such as EMI/rent, school fees, food and essentials, etc. It is important to factor in unforeseen emergencies such as health care or accidents, etc.,” said Adhil Shetty, CEO – BankBazaar.com
Shetty further said that as a rule, it is a good idea to have at least three months’ salary saved up as a contingency fund kept in a risk-free and liquid instrument. This emergency fund can help you keep going through situations such as loss of regular income. “If you do not have an emergency fund in place, set yourself a deadline for putting one in place. Set aside a fixed amount towards your emergency fund and consider it as one of your mandatory outflows just like your EMIs and grocery expenses,” he said.
Where to save your emergency funds?
While the SB account (Savings Bank Account) is a good place to start, the returns that most SB accounts provide are on the lower side. So you may want to look at the option of Liquid funds. Liquid funds provide average returns of 8%, which is higher than even most FDs today. Moreover, Liquid Funds invest in Government treasury bills, money markets, short-term corporate deposits and commercial papers. As all these instruments have a very low risk, you can enjoy high liquidity. Moreover, there is no exit Load.
“Most AMCs provide liquid funds with 1-day liquidity. Some AMCs even give you an ATM card to access your fund. So, instead of keeping your entire emergency fund in a savings bank account, you can keep part of this money in Liquid Funds, withdraw as and when you want, and earn extra returns in the process,” added Shetty.You may also try and save money in payments bank which are providing interest rates over and above the savings interest rate.