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What is Emergency Fund?

emergency fund


An emergency fund is a money that one should keep aside so that they can use it in a situation if they meet up with some sudden financial surprises. These funds are not to satisfy the daily expenses and basic needs, it is a support that one will have when they really need it in your hard time.


For Example –

  • Unexpected Medical Expenses
  • Job Loss
  • Vehicle repair or home decor
  • Helping someone close in his need
  • Unplanned traveling or entertainment expenses
  • Any financial crisis etc.

Why it is essential to have an Emergency Fund?

Having an emergency corpus must be the priority for everyone while planning for a great financial life. Let’s see some of the impacts of having emergency fund on your personal and financial life.

1. Helps you to keep your stress level low

When your know that you have an emergency fund, you can live a stress-free and relaxed life. Because you know that you have a backup plan and so if any emergency pop-ups you are already ready to face it.

2. No need to take an emergency loan

Taking a loan or asking for money in your hard time can sometime hurts your pride. Having an Emergency fund will be helpful not only to solve the problem but it also protects your self-esteem.

3. Don’t have to redeem from your future savings

Your savings are related to some very important future goals of yours. Contingency fund will help you to protect those dreams of yours by satisfying your today’s emergency need.

How to start saving for Emergency Fund?

Pre-decide your monthly expenses -

Plan your monthly expenses. Try to control your expenses as much as possible, so that you can save money to invest in your emergency fund. Today’s unnecessary expenses can have a bad impact on your savings for your contingency fund.

Set an auto deduction towards emergency fund -

When you set an auto-deduction for your emergency fund at the start of the month, you will not have any regret at the end of the month for not saving anything for your unexpected emergencies.

 Don’t touch the emergency fund for quick needs or smaller crisis -

Lot of people do this mistake, they use their emergency corpus for the some very small emergencies which they can handle with their routine expenses also. You should criticize the situation and

 Save for emergency before investing in long term goals -

You long term investments are related to your specific goals. So it is obvious that you have as emotional attachment with those investment and you don’t want to touch that money for any other purpose. If you have an emergency fund, then you don’t need to use the money you have invested for your future dreams.

Besides, some long term investment have lock-in period, so if you want to redeem your money before completing the maturity time period, you will have to pay some penalty charge.

How much emergency fund should you have?

Depending upon your income and expenses, the ideal thumb rule says that an emergency fund can be three to six months of your monthly income. For example, if your salary is Rs. 30,000 a month and you want 6 months of the emergency fund with you then the emergency fund amount will be 1,80,000 (30,000 * 6).

Why one should put emergency fund in liquid?

As we all know that emergency funds are such funds that are to be used in an emergency. One should never put these emergency funds in long term lock-in investment options because the money gets blocked. You can keep one portion of an emergency fund in your bank account so that you can withdraw it immediately going to ATM and invest the 2nd portion of it in liquid mutual funds. If you withdraw from liquid mutual fund then money will be credited in your account within 24 hours.

Where should I put this emergency fund money?

You can put your emergency fund money in below options -

  1. Liquid Fund
  2. Savings Bank Account
  3. Short Term Fixed Deposit
  4. Cash in Hand

What all will not be considered as a source of emergency fund?

There are various sources where if money is put it will not be considered as emergency fund because it takes time to liquidate these assets. And emergency fund means it should be highly liquid in nature. Let us see those options which will not be considered as emergency fund.

  • Home
  • Land
  • Luxurious Vehicles
  • Physical Gold (if we compare it to the any pandemic situation)