What Is An Emergency Fund?

August 02, 2022

What Is An Emergency Fund?

When you’re learning how to be financially responsible there are many hurdles that you may come across through the years. Emergency savings are a terrific place to start building your financial stability as a university student. You can’t always predict when an emergency will occur when you are studying abroad, but it is always good to be prepared. By setting up an emergency fund, you will not have any issues to worry about if an unexpected money crisis occurs. This will help you cover up any financial barriers that you may come across in the future while studying at your university. This blog will answer all your questions on what’s the best way to start saving up emergency money.

Emergency Fund

Emergency Fund Meaning

The meaning of an “emergency fund” is basically money set aside for use in times of an unexpected financial crisis. It is intended to promote financial stability, by providing a safety net that can be used to cover unexpected expenses such as illness, substantial house repairs, etc. An emergency fund’s assets are typically in cash or other highly liquid assets. This eliminates the need to incur high-interest debt, such as credit cards or unsecured loans, or jeopardises your future security by withdrawing from retirement assets. It is a necessary investment that you must set up to deal with any crises. It is a fund which helps in an unforeseen and unanticipated event (not for covering your regular expenses). As a result, you must tailor it to meet any unexpected financial gaps that may arise in the future.

Why Maintain A Liquid Emergency Fund?

The ability to pay for unexpected needs is the reason why emergency money should be liquid; this is the most important factor to consider when deciding where to accumulate your emergency savings. You should be able to withdraw the funds whenever and however you need them. At the same time, you must avoid being penalised in the form of an exit load or a pre-withdrawal penalty. The value of the investment should not fall and should provide outstanding returns.

How To Put Together Emergency Savings?

Emergency money is not developed immediately, but rather over time. Set away a certain amount each month in a separate bank account. It will soon grow into a sizable corpus that you desire. Assume you’ve decided to set aside Rs.1 lakh for emergency savings. In this situation, you can set aside Rs.5,000 or Rs.10,000 each month to build up the necessary capital. It is acceptable to reduce your investments in order to reach this goal.

What Size Should Your Emergency Fund Be?

It can be three to six months of your monthly payment, depending on your income and costs. For example, if you earn Rs.30,000 per month and spend Rs.15,000 on ordinary living expenditures, your emergency savings should be in the range of Rs.60,000 to Rs.1,000,000. You can even separate your emergency savings into two groups.

  • Long-Term Emergency Reserves:

This is where you put money aside for large-scale crises, such as a severe natural disaster or an unexpected medical emergency. This fund should be invested where the pay has a little higher interest rate, but it may take a few days to liquidate the funds.

  • Short-Term Emergency Reserves:

This is the fund you go to in an emergency. Such a fund pays modest interest but provides instant access, which in extreme cases can serve until you can access your long-term emergency assets.

Where Should You Put Your Emergency Money?

Once you’ve collected your emergency savings, you shouldn’t leave them exclusively in cash or in a bank account. Even though emergency savings are liquid, it is not something you should use on a regular basis. As a result, invest it in such a way that you may earn acceptable returns while maintaining liquidity. The best approach would be to distribute the emergency cash among liquid funds, short-term RDs and debt mutual funds.

Emergency Fund Redemption

In terms of liquidity, several liquid funds allow for instant redemption of up to Rs.50,000 or 90% of the deposited amount. You have the option to retrieve your money at any moment and the bank will immediately credit the funds to your bank account. Remember to check for this option before investing in a liquid fund to ensure that you can retrieve the money whenever you want. 

In a nutshell, having an emergency fund is being ready for the unknowns of tomorrow.

PS: If there’s anything more you’d like us to know about, add it to the comments section!

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KimberlyWitten by Kimberly From reading cheesy young adult novels to writing reviews about them. Books, have been an escape from reality. Writing, to capture a little bit of everything about my versatile lifestyle. Let’s talk but first grab some coffee!
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