Emergency or Contingency are terms, none of us want to come close to. We often avoid the idea of being in an unforeseeable and serious situation, which actually is disastrous in many ways. By not accounting for emergencies, we not only fall short in provisioning for our health& lifestyle, we also subject ourselves to unrequited mental duress. The biggest dent we make is in our finances, recovering out of which is quite an uphill task.
• What is an Emergency?
An Emergency can be a situation that poses immediate risk to health, life, property, or environment. Most importantly, it doesn’t announce its arrival leaving us completely grappling with the situation. It could strike us as a loss of job, large medical bills, major home or auto repair.
• How to circumvent an Emergency?
While Emergency is inevitable by most of us, we can definitely be better prepared for it. Being aware & informed, healthy, environment conscious and maintaining an emergency corpus can to a large extent keep us in a good stead, avoiding expensive loans and other debts. For this reason, Emergency provisioning is considered basic step to every Financial Plan.
• How much is required in an Emergency Fund?
Ideally one should have enough money to cover 3-6 months’ worth of living expenses as emergency fund. Living expenses here would include the essential expenses like food, housing, EMIs, transportation, utilities etc. You need not take into account discretionary expenses i.e. expenses incurred on things which you could easily avoid in an emergency like entertainment, vacations, dining out etc.
There are also simple rules of thumb that should be followed in order to maintain the fund like it should not be touched unless an emergency arises, or the fund should be available to you even at odd hours or working on a supplemental income can aid generation of Emergency Fund.
• Where to invest your Emergency Fund?
Emergency fund should be invested in an instrument which is safe, easy to access and could also earn you some interest. At the same time, it is also important to keep this money out of your immediate reach so that you cannot spend it on animpulse, no matter how much you would like to.
You could keep a portion of it in a separate bank account and the remaining could be invested in a liquid fund which will aim to provide you easy access and better tax adjusted returns. If you do not have an emergency fund yet, then you can start building up your emergency fund by saving small amounts on a regular basis.
The important thing is to start keeping aside some money for it even before you start spending your monthly income because Emergency doesn’t call, it just strikes.
Mutual Fund investments are subject to market risks, read all scheme related documents carefully.