Life , it is full of up and downs , we dont know when we meet with unexpected situations which makes our financial life difficult and we will badly need money at that moment. It may be loss of job or medical emergency which needs immediate access of money to smoothen the situation. Just go on and read this articles for need of emergency fund(EF) and how much EF is required and where to keep the funds ?
Why we need Emergency Fund?
Emergency fund is the money needed to handle emergency situations and helps to you to manage unexpected expenses. This money should be easily accessible whenever we come across emergency. We may face difficult situations in life and if you dont have emergency funds to handle it will make already bad situation , worst.
1. Medical emergency :
We never know when we get health issues , though you have medical insurance, sometimes you need to pay it from your pocket initially . What about the situation if that does not cover under your health insurance. How to handle it, where we get that money. That why we must need emergency fund to help these kind of situations.
2. Loss of Job
We are not secured about our job. We never know when we get the pink slip in the job,if your company is not doing well, we may get fire. Though we loose the job, we need to pay our EIM, children education fees and run the family as usual. So to handle these situation emergency fund is need to make it smooth at least you get another job. You get peaceful mind with this emergency funds until you get new job.
3. Breaking earlier Investments for EF results in not fulfilling the actual goals
As we invest based on goals that means some amount for retirement and children education and children marriage, If you touch that money for emergency situations, your actual goals may not be fulfilled because of disturbing these investments may result in loss of compounding. So never touch your earlier investments and always keep some funds for emergency.
How much Emergency fund is needed?
The amount of money needed for emergency is varies form person to person and general criteria is ,you need to keep 3 to 6 months of expenses ( including house expenses plus all EIM) in secure place.
In case every month you need 50 k for all your emis ,house expenses, children fees and food expenses, you need keep around 2L in your account for emergency need.
Where to park your Emergency fund?
Here Emergency fund is not an investment option to keep your money grow. Important point is always keep emergency fund in the form in high liquidity product, that means you must have access to that money immediately.
1. Saving Bank account
Saving bank account is the primary option by most of the people to keep emergency fund. It earns 4 % interest on the parked amount. Keep some 20 % amount in saving amount, remaining in other highly liquidate products which also earns more interest.
2. Term Deposits
You can keep some of the emergency fund is term deposit which earns high interest rate and whenever emergency situation arises you can break down the FD and take out the money and it nearly gives 7% interest rate and break FD will result 1 % less interest than current.Though it is win to win situation.
3. Liquid Mutual funds
This is another option to keep your emergency funds other than bank account, as name suggests liquidity in this funds are quite high and returns also good. But less individuals explore this option to park emergency funds.
4. Sweep in Accounts
Name of this option varies form bank to bank, some banks it called as sweep account , auto-sweep option , flexi deposit scheme. Whenever some fixed amount is crossed in your savings account automatically it creates FD s and which earns more interest. Whenever you require you withdraw it and automatically FD will be broken and funds will be available to you. So this option also helps you keep your emergency fund also easily accessible.
Never keep your emergency funds in risky products and non liquidate products.
Hope you realize the importance of emergency fund and keep some money parked to handle emergency situations. How you managed emergency situations in your life and where do you keep your emergency fund?