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Emergencies have an element of surprise, which is why they are called so. Besides causing emotional and/or physiological trauma, emergencies might also involve considerable financial repercussions. Facing the repercussion might prove to be a challenge if you don’t have sufficient savings at your disposal. This is where an emergency fund comes to your aid. 

What is it?

An emergency fund is a saving corpus that is designed specifically to finance the requirements of an emergency. Whether it is a medical emergency, job loss, or a rough business cycle, an emergency fund helps you tide over the contingency and meet its financial demands.

How and where to save?

It is recommended that you should have at least six months’ worth of your income in an emergency fund. For instance, say your monthly income is Rs.25,000. In this case, you should save at least Rs.1.5 lakhs for emergencies. This is the bare minimum requirement. 

When it comes to where to save, you need an avenue which is instantly redeemable and gives you access to funds within the shortest possible time. A bank savings account or a liquid mutual fund can be the ideal choice. 

Liquid mutual fund scores over bank savings account because it has the potential to offer you higher returns and the tax-adjusted returns might be higher compared to a savings account.

So, choose either of these avenues or both and invest in the emergency fund so that it can grow in the meanwhile. 

While you create an emergency fund, here are other steps that you should take to ensure that the fund is used for the purpose for which it was created –

• If you are investing in the fund, nominate your immediate family member to receive the benefit in the case of your premature demise.

• Inform your spouse and/or children about the emergency fund, its details and where it is invested. When you are indisposed, your family would be the one to access the fund, and so they should know where you have invested it so that they can redeem it when needed.

• Track the sufficiency of the fund. Try and supplement it regularly so that you are completely prepared for even the most severe emergencies.

Besides the emergency fund, have a life and health insurance plan too. These plans give financial security in major emergencies and help secure your finances. 

The bottom line
When planning your finances, emergency planning should be at the top of the list. If not, the other goals would suffer when you direct their savings to meet emergency expenses. So, build up an emergency fund and invest it in liquid avenues so that you can draw upon them when needed.