Financial Planning

Stop Ignoring that Emergency Fund You Always Wanted to Build

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Life is unpredictable. If a few months back, someone had told you that we would have to stay indoors for months at end because of a global pandemic; you would have dismissed it as a crazy conspiracy theory. But well, here we are, more than a month into a Lockdown.

With fears of financial insecurity and market instability on the rise during times like these, the investment which can come to the rescue is an Emergency fund. Basis your risk appetite, you should invest a plan for building Emergency Fund Here are the basics and benefits of an emergency fund:

What is an Emergency Fund?

An emergency fund is basically the money you set aside to deal with emergencies. It is a fund which you can fall back on if something truly awful happens like loss of job or a major repair to home or car or a major illness or the global crisis the coronavirus pandemic has created. It is also a healthier alternative to taking unsecured loans or using up the savings meant for your retirement or long-term goals.

How much do I save in an Emergency Fund?

There’s no one-size-fits-all answer to how much you should have in savings. The amount you need in an emergency fund varies person-to-person and depends on things like your age, job, liabilities, when you plan to retire, your lifestyle and your tolerance for risk. The thumb rule is that you to set aside three to six months’ worth of living expenses in an emergency fund.

How do I build an Emergency Fund?

There are two approaches – First approach is to start small. You cannot build an emergency fund overnight. You must have the discipline of setting aside a particular amount every month and not use it for planned purchases.  The other approach is to build up a bare minimum emergency fund. You can then funnel your monthly savings and set aside smaller amounts to fund this further. The second approach is usually adapted in case you are supporting a family.

Where to Invest your Emergency Fund?

You should invest your Emergency Fund where you cannot access it often. Yes, liquidity is important but also look for plans which let you earn decent and guaranteed returns on your savings. If you have a risk appetite, you could also look at building your fund with CRISIL’s No.1 online ULIP which offers a flexible policy term.

Is Savings an Emergency Fund?

The answer is – NO. Savings are what you put aside, to accomplish certain goals, like vacation, education, house, retirement, etc. Emergency fund on the other hand is mainly for the security purpose to be used in case of emergencies.

In a nutshell, be prepared for emergencies and uncertainties of tomorrow.  So, start building your Emergency Fund and funnel as much as you can each month into your savings today. We hope and pray you may never have to use it!

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