EMERGENCY FUND: What exactly is this? How much one should have and were to save and where?
Savitha: I am facing financial stress as there is a
sudden unfortunate medical emergency.
Rosy: Didn’t you have any emergency funds for
such a crisis?
Savitha: No! What do you mean by the emergency
fund? You know what, I had to dig out money from
my long-term investments. I am worried about how
to tackle future contingencies if any occur.
Rosy: Jenny, Emergency fund is one of the
critical goals one should plan for. You need to plan
for it first and then plan your other investment goals.
So, let’s understand the importance of an Emergency
Fund and how to build Emergency Fund with Jenny
What are Emergency Funds?
An Emergency Fund is money you set aside for when
an emergency upends your world and you need
money to do what needs to be done. An Emergency
Fund is needed to cover your emergencies and
safeguard yourself and your dependents against
these contingencies.
Why create an Emergency Fund?
As the name suggests, an Emergency Fund is needed
to cover your crises and there can be numerous cases
of emergencies. It can come anytime and of any
amount. To safeguard yourself and your dependents
against these contingencies, an Emergency Fund is
a must.
We should always anticipate our losses, not profit!
How to Build Emergency Fund?
> To manage any sudden or unexpected expenses
you should create an Emergency Fund so that in
the future you don’t have to dent your savings or
investments.
> While coming up with a budget for your emergency
savings, you should think about how much money
you need to live comfortably every month.
> Map out what this looks like by listing out your
expenses versus your income.
Following is a process of creating a emergency fund
1. An Emergency Fund is equivalent to 6-8
months of your monthly expenses and it is
the sum of money that you put aside for any
contingencies falling upon you.
2. If you have a variable income or if your income
is not fixed, then you should build a larger
Emergency Fund.
3. Set aside that amount in an instrument that
allows your money to grow, while providing
high liquidity to ensure you can access it
during times of distress!
4. What to do with Emergency Fund? An
Emergency Fund should not be confused with
regular savings. This fund can be utilized
against unplanned trips to the hospital, job loss,
pay cuts, sudden repairs needed around the
home, or fixing your car.
5. Create your Emergency Fund first. It should be
prepared before you start saving and investing
for wealth creation
6. Review every year to ensure your fund is in
How to redeem Emergency Fund?
>Emergency Fund should have high liquidity so that
you can withdraw the amount whenever required.
> You can withdraw the amount from an ultra-short term fund and high-yield savings account
whenever required without any penalty.
> However, You can withdraw the amount from Recurring
deposit only at maturity, if you want to withdraw the amount
before maturity then premature withdrawal is
allowed with a penalty.
So start with your emergency fund before you start with your investment journey and stay in peace during emergency
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