How to Create an Emergency Fund?
Last Updated : March 15, 2022, 11:17 a.m.
We often look to build a corpus for education, marriage, retirement, etc. But somehow, the focus on creating an emergency fund to deal with uncertain times remains missing. There’s always a possibility of losing a job or facing health issues, affecting us financially at such times. Health insurance does help by covering maximum illnesses and conditions, but not all! Besides, the coverage may also come with certain terms and conditions. So, having an emergency fund ready will always come in handy for you. But, how will you create the same as you cannot be sure of the exact corpus you require to meet emergency expenses? The eventual expenses may beat your estimates… So, a predefined plan is not okay! Instead, change your plan periodically to stay cool should emergencies arise. We can shed more light on the same. Let’s read on!
How to Estimate Emergency Fund Correctly?
Financial advisors suggest saving 10-15% of your income by the time you start earning for emergencies. But look to save more by taking advantage of the annual appraisals or the hike you receive on switching to a new job. Being a step ahead while planning is always beneficial.
So, Which to Trust for Building Emergency Fund?
In emergency times, you require the assurance of having money anytime. So, save in bank and postal deposits that allow you the same. You can even put money in equities or debt instruments offering you liquidity throughout. The distribution, however, should be more towards bank & postal deposits that are free of market fluctuations.
Shall You Invest in Equity & Debt Instruments Directly?
Stocks, bonds, debentures, money-market instruments offer better returns than traditional bank & postal deposits, albeit with higher investment risks. You can, however, invest in all these through mutual funds too. Here, you can take professional portfolio management assistance from fund managers. The returns may be slightly lower compared to that of direct investments. But the risk management will be better as fund managers pick instruments carefully based on the prevailing market conditions. So, if you can’t do this on your own, invest in mutual funds to stay on course.
How to Ensure Seamless Investments for Emergency Fund Creation?
Creating an emergency fund requires maintaining investment discipline at all times. What may hinder the same is your tendency to go overboard with things such as credit cards , unnecessary loans, etc. You can still pay your credit card dues on time to avoid interest charges. But excessive credit card shopping may not leave you with the amount you need to invest for emergencies. So, stick to a particular shopping limit and create space for fruitful investments. Also, avoid taking a loan to purchase consumer durables. The lesser the debt burden, the easier it becomes to invest adequately.