Life is unpredictable, and everyone must have savings for emergencies. Not all days are filled with sunshine. Thus, it is vital to prepare for the rainy days. Many individuals invest in mutual funds, park funds in their savings account, or opt for fixed deposits to build the emergency corpus. Let us understand this in more detail by understanding the concept of emergency funds.
What is an emergency fund?
Emergency funds help you deal with the unexpected. According to most financial experts, the fund must have money to meet three months to six months of basic living expenses.
Generally, salaried professionals have more secure employment. Therefore, securing finances for a three-month timeline is suggested. A six-month timeline is for those who depend on variable incomes.
Features of an emergency fund
The emergency fund must have a sufficient amount of money to meet daily expenses for 3 to 6 months.
You need the money from an emergency fund urgently. Therefore, you must invest in liquid mutual funds that you can access in a day or two at most.
- Not affected by volatility
You can encounter the need for emergency funds at any time. There is no scope for handling volatility in this case.
The need for an emergency fund
You cannot predict emergencies and the associated financial burden. With the ongoing Coronavirus pandemic, many individuals have seen emergencies such as pay cuts, loss of a family member, job loss, etc. Unemployment and medical contingencies mandate the need for an emergency fund to sail through the tough times.
An emergency fund helps you fight any exigency. Another advantage of emergency funds is that they avoid derailment of your saving for long-term goals.
How much should you invest every month?
You cannot anticipate the size of an emergency. It can be as small as a car breakdown or as big as a job loss. If you lose your job for several months, you will not only have to meet daily living expenses but also continue to pay out liabilities like credit card bills and EMIs.
To determine how much money you need to put aside each month, there are different factors you need to consider.
- Average monthly expenses: You need to estimate how much you spend in a typical month. This amount varies from one person to another.
- Current liquid savings: Do you already have funds available to meet your basic monthly living expenses in case you lose your job? You cannot include your retirement savings here since their liquidation will result in tax consequences.
- Evaluating the degree of emergency: While this aspect is highly subjective, you must assess how much money you can need and how much time you will need to replace your current income.
Investors must use a systematic investment plan (SIP) to build an emergency fund. Experts suggest liquid mutual funds as they offer returns and are safer than other debt investments. Use the Tata Capital Moneyfy app to compare and invest in funds from different houses to meet your financial goals.