Emergency Fund – Plan B at work when your Financial Plan A is at Risk!

Emergency Fund Plan B at work when your Plan A is at Risk!

It was middle of the month; Prakash was done with his loan EMIs, Car Insurance, son’s tuition fee, grocery shopping, and, like every month he could also save Rs. 7000/- in #taxsaving mutual fund and #PPF. As he was just a few clicks away from making the investments, his son came running and
informed him about the school trip, this had skipped his mind while planning. This time they have planned to go to Shimla for camping and the contribution was Rs. 25,000. He almost collapsed to even imagine how his investment plan will go haywire; he may need to borrow from a colleague or somebody to meet the extra expense which will also have negative impact on the budget for next few months. As he was thinking the best possible way to manage things, his wife came to his rescue and handed over Rs. 25,000 to Prakash and smiled. Prakash was in awe an shock as he only gave her money for grocery and some routine expenses each month. The intelligent lady explained as she was given the money, she removed a certain amount and kept in her piggy bank each month for emergency needs and she has been doing this since their marriage. And, today the fund is big enough to take care of family expenses for three months in an emergency situation.

We need an emergency fund

This event is an eye—opener. Many a times we bump into unplanned expenses on account of sudden medical emergencies, education, job loss, accidents etc. An emergency fund doesn’t only helps financially, it also offers a much needed mental peace to handle the situation better. The size of the fund could however vary depending on various factors.

Corpus size

Safer the better, so bigger the better. However, everyone has a risk profile of his/her own. While deciding the amount, keep few things in consideration –
1. Do you have funds to take care of 3-6 month of family expenses handy if you fall sick?
2. Are you confident to take the risk your current job for your dream profession?
3. Will you be at ease financially if your ailing parent need a sudden medical attention?
4. Do you have a child with special care needs? Consider the unavoidable monthly expenses – Loan EMIs, Insurance premiums, investment obligations and other family maintenance expenses

How and when to build that large liquid corpus

Good old days are gone when grandmother had hidden boxes with gold coins. Now, you have better options as your money can also earn. The best moment to start it is the moment you conceive the idea. The fund should only grow bigger as you age. Remember, it should be liquid (easy to withdraw). One can start with a simple savings account or a recurring deposit in any bank. A savvy investor with higher tax bracket (20-30% )can also opt for a liquid mutual fund. {I don’t suggest an equity mutual fund/ stocks here as every investment has its own purpose. Liquidity and safety of the corpus is the priority here}

How do you manage the fund Once, the corpus achieves the desired level, it can be kept in form of a fixed deposit with a reputed bank or a liquid fund. It also should be reviewed periodically and increased as and when required. Whenever the fund is used, one should take effort to rebuild the corpus again in a planned manner with priority.

What to remember 
Emergency Fund is a substitute for #health insurance, #life insurance, #retirement planning, #mutual funds.
Emergency Fund is not a substitute for #health insurance, #life insurance, #retirement planning, #mutual funds. Emergency fund is a Plan B to take care when the Financial plan A is in danger!

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2 Comments Add yours

  1. dkmathstats says:

    Having emergency funds handy is really helpful. One should keep in mind that it is so much easier to lose money than to earn money.

    Like

  2. Hence, One need to be mindful about what he/ she is investing in, be patient and have realistic expectation on return

    Like

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