Create an effective emergency fund

An emergency fund is an essential addition to every financial plan. Too often we tend to postpone creating an emergency fund in favour of investing or spending. However it will be wise to remember that an emergency fund can save you from financial ruin and emotional distress.

March 04, 2014 10:25 IST | India Infoline News Service
Darpan Singla, 35 year old French teacher lived in a suburb of Mumbai. One Saturday evening she got a call from her husband Jitesh who was out for work, that he is taking a cab home because he is feeling unwell and uneasy. At 37 years of age, Jitesh had heart attack and was taken to the hospital and stabilised. For Darpan, the next worry that crashed on her head was finances.  Though they had a health insurance policy, the hospital insisted that she deposit Rs 2 lacs before they started the surgery he needed. The family just did not have that sort of liquid or readily available funds. It was finally Jitesh’s boss who came to the rescue and deposited the cash.

We all face situations in our lives where we need cash in a hurry and the situation is usually a high stress one. Add to it lack of availability of ready cash, the stress levels can explode. An emergency fund is a reliable fall back. An emergency fund or contingency fund is money put aside on a regular basis which should be accessed only in case of an emergency. Here are some important things that you must know to have an effective emergency fund.

It need regular input to reach a substantial amount

If you don’t have much to save, it doesn’t matter — the important thing is just to start. Put aside some money every month into the fund. If you manage to save some unexpected money or get a bonus, you could out that aside to help the fund grow faster.

Make sure it is enough

 At an absolute minimum, it should cover your daily living expenses for three months. Six months would be wiser, and ideal would be that funds should cover a full year’s expenses.

It meant for emergencies only

Buying a television is not an emergency nor is putting down a down payment for a car. An emergency fund is meant for genuine emergencies. Building an emergency fund helps avoid any financial disaster that can happen due to an unforeseen event where money is urgently required. It prevents you from falling into financial distress during difficult times. For instance in emergency you may resort to borrowing on credit card and end up paying horrendous interest rates, leading to delays or defaults in payments and a crash in your credit score.

Pick the right place to put your emergency fund

Once you decide on saving money for emergency fund, pick the right place to save your money. Ideally, emergency funds should be easily accessible and easy to withdraw. It should be maintained in cash or cash equivalent form.To get some return from the money, you could break the fund down to 3-4 emergency funds with one of which must be accessible as cash and the others in safe investments which could be liquidated within 2-3 days.

The author is Co-Founder & Director, CreditVidya 

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