When financial planning it is key to have an earmarked investment for emergency or “rainy” days, i.e. money set aside for unexpected situations. The key here is to keep your emergency fund separated from your regular savings to protect it from sudden withdrawals such as job loss or an expensive medical bill.
The aim of your emergency fund is to help tide over sudden needs without taking loans or borrowing. It helps build flexibility to handle an unexpected turn of events without putting immediate stress on your day-to-day finances.
How much emergency fund should I have?
The thumb rule to deal with situations without immediately acquiring debt is collecting equivalent of three to six months of expenses, suggests Clear Tax. It added that for those in more unstable income situation i.e. freelancers, those with dependents, medical conditions etc., the savings should swell to cover 6-12 months of expenses.
Chartered Accountant Nitin Kaushik in a post on social media platform X, shared some ways to build your corpus:
- Further, if you are on unstable income, the expenses total should be multiplied by 6x to 12x, as you reach each goal.
- It is advisable to take stock of your expenses every few months to keep a track of how much you are spending and if the fund total meets calculations.
For example, if your monthly spend is ₹25,000 for six months that works out to ₹1.5 lakh as emergency fund. This can be built in stages, starting from ₹500-1,000 each month, or even a little more or less depending on your ability. However, the key is to consistent and habitual.
Where should I invest to build my emergency fund?
Your emergency fund should be separated from the accounts you use for daily expenses. There should be a minor barrier so that it’s not too easy to reach for daily use; but liquid enough to access when required.
Clear Tax suggests options that make optimal returns while remaining accessible and safe. For this, it suggests the fund being split across two types of investments, as follows:
Ideally, when it comes to emergency or rainy-day fund, you should stay away from investing in volatile assets such as penny stocks or risky equities, which can fluctuate significantly in the short term. While they may be high risk-high return options, these are not suitable for emergency purpose.
Disclaimer: This story is for educational purposes only. The views and recommendations made above are those of individual analysts or broking companies, and not of Mint. We advise investors to check with certified experts before making any investment decisions.
