An emergency fund can be referred to as the pool of liquid money which is set aside for unforeseen expenses. They are the backbone of strong personal financial plans.
Ideally, your emergency funds should be 3-6 months of your expense and growing your emergency fund should be your utmost priority. These stash of money helps in covering the financial surprises which can be costly and stressful. It is an essential corpus that you must keep aside to tackle emergencies.
The whole point of having an emergency fund is to save you from debts and also prevent you from scrambling to wrangle up the money at the last minute
How Much one do you need?
Ideally, one should have six months of monthly expense in Emergency fund.
Ex. Family expense is 30000 rs, Emergency Fund= 6 X30000= 180000 Rs.
Advantages:-
- Earn Interest- You get good 6-8 % return on Debt category fund
- Avoid Costly debt- It saves from unexpected medical emergency, unexpected bills etc
- Peace of Mind- It keeps your nerves cool. There is always a pocket which you can resort to
- Keeps you ready for Investing opportunity:- When you see there is massive Sell going on in Equities, you can use your emergency fund to mop up the equity at lower Rates and again build your emergency fund
Where to invest:-
- Liquid Fund – this fund offers 4-5 % returns. Very much secure.( for short duration 1-2 months)
- Ultra short term funds- for 6-8 % return. ( for 3-6 months investment)
- Bond funds, Banking and PSU funds- 7-9 % returns ( > 1 yr investment)