Emergency Funds - How and Why are Emergency Funds Important?
Emergencies always come unannounced; yet they are an irreversible truth of our lives. Therefore, it becomes necessary that we have at our disposal, an appropriate financial support system, in other words, an emergency fund.
What is an Emergency fund?
An emergency fund is the essential corpus of money that you should keep aside to tackle the unexpected financial curve balls that life throws at you. It works as a safety net, protecting you in case of an unplanned, uncalled for situation. However, this should be a fund meant to be used only in an hour of crisis and not for regular expenditures.
Emergencies do not exclusively refer to medical emergencies, but rather, it is an all-inclusive term. Any diversion from the regular, routine life, which calls for a sudden big expenditure, not included in the day-to-day budget, qualifies as an emergency. This could be major car fixes, or a sudden change of job, or even unemployment for that matter. Building an emergency fund which can work as a rainy-day fund is extremely important.
Liquidity of the Emergency fund:
Having established the importance of building an emergency fund, the next thing that you need to ensure is that the fund is easily available. However, the planning of the emergency fund should be a gradual process. It requires much deliberation and research. You need to take into consideration several factors like income, expenditure and the interest offered. Ideally, an emergency fund should be equivalent to at least three to six months of your salary, taking into consideration your monthly income.
How to plan your investment?
Emergency funds can be either treated as long term or short term. The amount of money that you keep aside to create your corpus of emergency fund, is actually months worth of expenses. A Savings Account serves as a good option when making such an investment. However, it is extremely important to take into consideration the interest rate offered by the bank where you will eventually park your funds.
You can read more on the difference between savings and investments here.
Long-term emergency funds: these investments offer returns at a competitive rate of interest, and should remain untouched in order to ensure availability in the long-term.
Short-term emergency funds: as the name suggests, these are easily available in case of a sudden emergency, but do not offer much in terms of returns. These help people survive short-term emergencies.
Saving for an Emergency Fund:Saving by itself is a good habit, but saving for something like an emergency fund should be a regular, planned and disciplined process.
Set a practical monthly savings goal- this helps establish the habit of saving money. To avoid any diversions, you should immediately transfer your funds to the savings account as soon as you get your salary.
Transferring your tax refunds can also be a way of increasing your corpus and avoiding unnecessary expenditures. Constant tracking of the emergency fund is extremely important. Any withdrawals made should be certainly replenished to ensure that there is no shortage of money. This is your rainy-day savings and it should eventually serve the purpose.
Put your worries to rest, and brace yourself against all the odds of life. Secure your future by making an informed choice today.
If you want to save funds for a rainy day, you can do so easily with an HDFC Bank Savings Account.
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*Terms and conditions apply. The information provided in this article is generic in nature and for informational purposes only. It is not a substitute for specific advice in your own circumstances.