Emergency Fund Investment: We know that life is full of surprises, and that unexpected events may knock your door anytime. We all face such situations where we are in a dire need of money and we don’t have any plan for it.
“Unexpected things happen in life more often than you expect.”
–Plautus
From job loss to repairing a worn-out smart phone- big or small- these unplanned expenses are no less than a nightmare.
You must be thinking- can I deal with such expenses?
Yes! It’s possible if you can build an Emergency Fund.
I have listed some of the easy-to-implement tips on the emergency fund investment. You’ll get to know about the emergency fund, its need, how much should you save for it, how you can build an Emergency Savings, and much more.
Let’s get started!
What is an Emergency Fund?
As the name suggests, Emergency Fund is a cash reserve that we set aside to meet expenses during emergencies. It is also known as Contingency Fund.
The emergency may be a sudden job loss (or unemployment), unexpected medical bill, expenses due to repair or replacement of a worn-out phone or any other home appliance, unplanned travel spendings, etc.
You can notice that all these expenses are usually not the part of our regular expenses which we expect every month. This is the reason they are known as unplanned expenses.
Why Do We Need an Emergency Fund?
Building an emergency fund is considered to be the first step in the personal finance journey.
Emergency fund offers an immediate source of money to meet unplanned expenses (as mentioned above).
A planned investment in emergency fund keeps you away from high-interest bank loans or credit cards. As a result, you avoid getting into the debt trap that can arise from taking out a loan.
How Much Should You Save For It?
The finance experts recommend having three to six months worth of your expenses in emergency fund.
If your monthly expense is Rs 50,000, then you should put aside a minimum amount of Rs 1,50,000 (3 * Rs 50,000) in your emergency fund.
It would be much better if you could save aside enough money for a six-month emergency fund. For the above case, this would be Rs 3,00,000 (6 * Rs 50,000).
This will keep you out of debt and allow you to find a new career with peace of mind!
Now, the question comes: where should I park my money?
You can rely on any investment option that offers high-liquidity and is less risky. After that, you can compare it with its peer group on the basis of their past performance (or return).
Here are few options for where you should park your emergency cash:
1. Savings Account
A Savings Account is the safest avenue to park your emergency cash. It would give you an easy access to your money and you would also be able to earn a decent return of 3.5%-6% out of it.
2. Bank FDs
Bank FDs can be a great alternative for your emergency fund. They are safe and known to provide guaranteed returns and can also meet your liquidity needs (keeping tenure in mind) if you have selected the plan wisely.
3. Debt Funds
Debt fund tops the list and are most preferred as an emergency fund.
The higher liquidity, low risk, and ability to provide higher returns than Bank FDs make them fit for this role.
Moreover, they offer different plan that suits the needs of a variety of investors.
For Emergency Fund, you can go with Liquid Funds, Ultra-short duration funds, money market funds, etc. with tenure of more than three months.
- Important Note: Before selecting an emergency fund, the goal should not be to obtain huge returns, but rather to ensure the liquidity and safety of the capital while earning nominal returns.
How to Build an Emergency Fund?
So far we have discussed about emergency fund, its need and how much money can be set aside for investment in an emergency fund.
Now, it’s the time to discuss how we can actually build an emergency fund.
Here are some easy-to-implement hacks you can follow:
1. Set a Goal to Build Emergency Savings
This is the first step you need to act upon. You should calculate as to where you are spending every month and how much you are able to save.
This would give you an idea about how much you have to contribute in your emergency fund. You’ll also be able to estimate how long it will take you to accomplish your target.
2. Cut Down What’s Unnecessary!
Our routine expenditures also include some unnecessary extra costs that aren’t that meaningful to us.
This includes frequent restaurant meals (or food deliveries at home), paying for more than one OTT Platforms, preferring expensive beverages too often, going for a party every weekend, etc.
These are some of the expenses which you can reduce or even cut down from the expenditure list.
You can also prefer taking public transports or using energy-efficient appliances at your home.
These small-but important steps enable you to save more and help you to achieve your target in a short run.
3. Automate the process of Investment in Emergency Fund
As I’ve previously mentioned, it’s challenging to keep track of your spendings and consistently save money for emergencies.
Are you facing the same issue?
If yes, automating investment is the simple fix!
This would allow the automatic transfer of a pre-defined amount from your bank account every month.
This is a simpler process and it’ll let you contribute to your emergency fund every month without even worrying about it.
4. Reward Yourself🏅
Don’t miss your chance to reward yourself if you are able to meet your savings goals. It’ll encourage you to reach another goal with the same enthusiasm and vigor.
You may choose dining-out, buying your favorite dress or book, going for a short-trip, etc.- anything that you love the most (keeping the budget in mind). However, not only in the case of emergency fund, you can do the same in meeting your other financial goals too.
This was all about the savior of bad times “Emergency Fund– Investment Guide for Beginners“. Building the same helps you survive during the crisis and enable you to recover faster and get back on track.
So have you established an emergency fund? Are you still planning for it?
If yes, what are you waiting for?
Give a kick-start to your Personal Finance journey by planning for an emergency fund today itself!
You can share your valuable thoughts in the comment section. I will read them for sure.
See you soon!
Happy Investing!!