Emergency fund is the first step towards implementing a financial plan as it helps tide over an unexpected expense or to manage a family crisis. For example, if you were to quit or lose your job, an emergency fund should be able to ideally meet your expenses for up to six months, while you look for another job. Currently, in India, only a minority of the working population is prepared to face the immediate challenges financially. Though an emergency fund, robust enough to cover 12 months' of expenses is better, anything near six months' of expenses is also good enough.
Are credit cards really meant for emergency?
Often, people consider credit cards as their best bet to beat emergencies. Raghuram boldly paid for the the medical urgency of his old ailing mother by using his credit card, however, later he realized that after paying off the credit card dues, his finances were in a mess. If he had kept some contingency to face the emergency, he would have managed his monthly expenses easily, which became difficult to meet.
Ways to bolster your savings for emergency fund
The task of saving half the year's expenses as an emergency corpus is so daunting that people often avoid even starting the process. It is reasonable to systematically make the corpus grow rather than looking at putting it together at one go. Building an emergency corpus essentially depends on the increase in savings and reduction in expenses. However, here are some of the lesser known ways to help boost it.
- Go on a spending diet: If you are a regular weekend spender than you can substantially cut down your expenses by planning two out of four/five weekends at home. You will surely see the high rate at which money is saved which could be redirected towards the emergency corpus.
- Bargain-shopping or the 'Big Sale': Try something new from the local markets, which are great places for bargaining rather than purchasing an expensive brand or you can even do most of the buying during the 'Big Sale' time. Either way, you will see your savings go up.
- Money out, money in: Set up an automatic transfer from your salary account to your savings account as once the money is out from your spending account, you have less chances of squandering it away.
- Sell the unnecessary stuff: More often than not, you might find some things which are lying around your house for no reason; so, it's best to sell it on online portals like 'Olx' or 'Quickr'. This way you are not only making your home clutter-free but also adding money into your kitty.
- Psychological advantage: Ensure that you keep all your savings for an emergency fund at one place so that you can actually track and monitor your savings' progress rate. A positive increase in your savings is in itself a great motivational boost to work more towards creating it.
Once you have saved the required amount, you should keep 10-15 per cent of it in cash with you. Divide the rest and invest around 40-50 per cent of it in money market funds while the residual amount can be put into bank savings account with the FD (fixed deposit) sweep in facility. Be informed about the withdrawal as it should be liquid and readily available to you.
A word of caution
Never use your emergency fund for anything other than a real crisis, so whether it's an urge to buy a new attractive item or your car repair, the corpus for emergency should be untouched. Moreover, when the emergency fund is used, it should be replenished at the earliest and should always be maintained in proportion to the change in your expense patterns.
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