Emergency Fund and Where to Keep It

This is the first of many articles I'll be writing in order to help a person understand and plan their Personal Finances better..! It's been a long term goal to do this and I am happy that I have started this finally..!

Personal Finance is something which should be understood and planned at the grass root level. I feel it should be a part of our daily subjects in School / College, where understanding how to play with your salary, where to put it, how much to spend and how much to invest should be a basic human need.!!

What is Personal Finance?

Simply put, whatever it takes to plan your own life, talking in monetary (money) terms comes under Personal Finance.

From salary to savings to investments and expenditure, we will go through everything in this newsletter, so if you are interested you can subscribe to it. (Subscribe button on top/bottom of screen too)

What is an Emergency Fund?

This is one of the most complicated as well as most under valued component of your life.! That is why we will be starting with is as it is SO IMPORTANT..!

Emergency Fund is that amount of fund that you think you will require in any type of Emergency..! Simple enough? Haha, not really..! What types of emergencies are there?

• Medical Emergencies
• Job Loss / Unemployment / Transfer period
• Financial Loss
• Abrupt mega expenditure
• Anything that is out of the blue and you need to fallback on your "side kept fund".

Does Medical Emergencies really come under Emergency Fund?

Nope..! In practical terms, medical emergencies should not come under your Emergency Fund. Why? Because the proper way to have an "Emergency Fund" for medical related things is to have a Medical / Health Insurance as well as Life Insurances.

Please do not get an insurance + investment scheme. It's totally worthless and does not mean a good financial plan.

We will be talking more about medical emergencies, insurances and how you can get one in the best possible way you can.! Till the time your treatment is covered under this, you don't need explicit Emergency Fund for it.

Then why do we need Emergency Fund?

We need it for our other emergencies - job loss / unemployment and abrupt mega expenditures. When we lose our job, or have a big transition period, we still have to eat, we still have to pay rent and other bills. Where does this come from? This is the emergency fund which we are going to talk about.

Is savings same as Emergency Fund?

Yes and No both. It's the perspective you see. Normally people say that when we "save" we invest. But for me, and which should be the case, your "savings" are nothing but money that you keep "for emergency purpose" - which is the money that you can't invest, can't grow and cannot earn from it. Yes, it looses it's value over the time (inflation) but it's similar to what you keep in a "Savings Bank Account". Let's see where and why?

Where to keep the Emergency Fund?

Now this is an interesting question. As per obvious reasons, we need this fund to be "available at any instant", typically within minutes, not even hours. Therefore, we cannot put this in any FD, tax saving Mutual Funds, Smart Deposits and whatever.

Initially, this is what needs to be there in Cash / Savings Bank account with you. Yes, this money is losing its value overtime (inflation) which we can hedge (I'll tell you how below).

A normal SB (Savings Bank) in India gives you an approx 2.5% - 3% rate of interest (per year) which is much lower than inflation (6-10 % per year). You are losing money if you keep your money in your Savings Bank, hence only what is needed for emergency purposes and monthly expenses, you should be keeping in your SB. Rest, everything should be distributed in multiple areas of investments to grow and beat the inflation. We'll talk about investments later.

One way to hedge (protect) your Emergency Fund (Saving Account balance) is to keep the bulk of this in Liquid Mutual Funds / Debt Mutual Funds. Now, you would be asking me that I said Emergency fund should be available in minutes, whereas Mutual Funds are not.

Debt Mutual Funds / Liquid MF are those which can be available in 24-48 hours period. Now comes the magic of using a Credit Card to pay for immediate expenses and paying the total bill (yes, always pay total bill) back in 24-48 hours of time by selling your Debt MF.

This way, you can get at least 5-6 % rate of interest for the bulk of your emergency fund, which can at least be at par with inflation (~6%).

How much money in Emergency Fund?

Simply, ask yourself this question -- If I don't have a job for 6 months to 12 months, I need to pay for my rent / bills / food / utilities that are a basic necessities of living. No extra expenses, wants, luxury, mobile phones, trips, anything.

Conclusion

Emergency Fund is 6-12 months of your "monthly expenses" of basic human needs, kept in Debt MF + Savings Account + Credit Card, which can be available in a few minutes.

I hope you got the basic essence of this, from a very simplistic view. If you like this article, do Like ??, Share ?? and Comment ?? and don't forget to subscribe ? to this newsletter..!