Emergency Fund Archives -

This is How You Can Plan Your Emergency Fund

Mon, 23 Jan 2023 16:48:14 +0000

The Buyt Desk

Emergency fund refers to the amount of money you can set aside to successfully meet unforeseen, urgent, and real emergencies that can’t be dealt with insurance plans or other ways. You should have an emergency fund for supporting you in unplanned and unexpected situations like medical emergencies, temporary job loss, or sudden travel for dealing with family emergencies.

Apply a Figure to the Contingency

Starters must keep a minimum of 3-6 months’ worth of basic living expenses as emergency funds. After some time, you can increase this figure to 6-12 months’ worth of expenses.

Wondering how to determine your appropriate monthly living and non-negotiable spending? The following is the approach you can follow.

Initiate with important ones like rent and/or home loan EMI, utilities, transportation or fuel costs, food, and non-food consumables, school fee, healthcare investments, salaries for support staff, and other load EMIs. You may also wish to consider significant annual expenses like insurance premiums.
Remaining non-essential but frequently done expenses on vacations, eating out, entertainment, and other things are not the categories you invest an amount on during emergencies. Therefore, those can be simply left out for starters. The purpose is to emphasize just common important and inevitable spending.

Hopefully, now you would have understood that your living spending is different from what your friends or colleagues experience. Thus, just because a friend takes out INR 2 lakh for emergencies, this doesn’t shows that the same amount of money is enough for you.

This is important for you to determine what is perfect for you. Other than the things mentioned in the above points, there are some more things you can consider. These are listed below points.

Are you and your life partner both employed or you are the only earning member in your family?
Does your job profile belong to a high-risk industry and how strong it is stable?
What total number of dependents do you have?
What is the total number of occasional dependents you have in your extended family, who need your support to meet financial emergencies?
Would you like to have an extra buffer to keep on saving for your crucial goals including children’s education, retirement, and others in times of emergencies?

At the bottom line, thumb rules like “save 6 months’ worth of expenses” are considered perfect to start with. However, for a highly secure future, you will have to keep on saving further. In certain cases, saving 6 months’ worth of expenses may not prove sufficient.

Let us assume that you are planning to quit your job and thinking of starting a new business, you may require keeping aside enough amount of money for some years. At this time, just having 6 months’ worth of expenses would not make you feel safe.

In today’s world, credit cards are also preferred to meet emergencies. Credit cards can be used to tide over your short-term emergencies. Remember that, ultimately, you will have to look for the funds and pay again. Hence, a credit card is not the right alternative for an emergency fund.

Don’t know how to save a huge amount to quickly meet emergencies?

Save your emergency funds gradually using your monthly savings. You can even use your bonus to top it up irregularly. Whenever some amounts are frozen in the bad investment simply exit them. Now, use the proceeds to increase the emergency fund.

Where to Store Emergency Funds?

Conservative people should stick to their FDs (fixed deposits). Alternatively, they can keep a small section of their savings account and get Flexi-FDs, which have identical liquidity to a savings account but deliver FD-like returns.

Less conservative people can consider a blend of debt funds and FDs.

Emergency fund size is dynamic. Thus, review it annually. Save more when you need a large amount due to changes in situations. Replenish the fund for emergencies as soon as possible. You can do this regularly through monthly savings or by using your yearly bonus partially.

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Are You Ignoring Your Emergency Fund?

Sun, 25 Dec 2022 08:49:25 +0000

The Buyt Desk

Life is changeable and unpredictable. No one can guarantee what would happen in the coming time. The COVID-19 pandemic is one of the biggest examples of it. Staying indoors away from near and dear ones for months with a lack or no financial support is a sudden shock for almost every person. Several months into lockdown taught every person the fear of financial insecurity and the importance of having an Emergency Fund.

What Is Emergency Fund?

As the name depicts, an emergency fund is the amount of money you have saved to successfully fix emergencies. This is the fund you can make the best use of during unforeseen circumstances such as major illness, vehicle or property repair, job loss, etc. Rather than using savings required for long-term goals/retirement or buying unsecured or unaffordable loans, you can use this healthier and safe option of an emergency fund.

How Financially-Prepared Indians Are?

In one of the recent surveys, it is found that Indians are financially not prepared for job losses and medical emergencies. A financial education company, Finsafe India, surveyed that according to 5,769 salaried Indians, financial goals planning is a major problem for salaried people in India.

56% of Indians realized that financial goals planning was a tough financial challenge.
30% of people were stressed about being unable to financially support their elderly parents.
25% found paying medical expenses highly challenging.
22% of people are not able to repay personal loans and credit card debts.
54% of Indians felt that they were not ready for finance management when they lost their jobs.
52% of people said that they had financial support from their companies but were not sure if that fund is enough.
21% found that they were not ready to meet financial emergencies.

Only 27% of respondents from this survey stated that they had life & medical cover and an emergency fund. 41% of people were investing in mutual funds and 35% still prefer insurance policies & FDs (fixed deposits). It is surprising to know that about 34% of people were unaware of where they must invest. 71 percent said that they were depending on detailed financial planning and 48 percent on budgeting and savings. 20% of people have put their money into insurance and loans.

Way Of Investments

How and where you are investing is an important aspect of whether or not to meet your financial goals. The survey declared that usually, investments are made for a short time generally when there is a rise. When the market rate gets reduced or in situation of volatility, companies leave the market. Eventually, investors have no possible returns in the long run. Low savings and no return on investment make it challenging for people to cover their financial emergencies and goals.

Wrong Investment

RBI (Reserve Bank of India) annual report 2022 stated that household savings are held mostly in FDs, which neither beat inflation nor are tax efficient. 61% of GNPI (Gross National Disposable Income) is organized in deposits vs. insufficient 0.5% of GNPI in equities. As per the report outcomes, people are unable to estimate the funds they require to save for goals and their significance. For example, salaried individuals can’t understand that they not only need employee provident fund (EPF) for retirement but equity exposure as well. This will help them in creating a higher retirement corpus.

Significance of Financial Advice

In India, financial advisors are considered only the person who is selling products. Not all financial advisors are necessarily equipped to discuss financial planning and its significance. Since the requirements of investors keep changing, there comes a need to modify the way stakeholders consider financial planning. Also, regulators have to provide a push for financial planning-based suggestions.

All over India, there is just 1324 RIA (registered investment advisors) doing financial planning. You may also find online platforms offering financial planning tools. Unfortunately, these tools don’t support human interaction which makes financial planning incomplete. These tools can be used for financial advice but they can’t understand your emotions.

Advisors need to understand that they have to add value via holistic financial planning rather than only suggesting schemes. They must gain increased and updated knowledge for the same along with its certification. Investors also need to be more practical to pay fees. In verdict, both financial advisors and investors should consider structured financial planning.

How To Create Emergency Fund?

To build your emergency fund, choose a target date for setting up funds based on the current financial circumstances. Get stock of your existing assets and allocate some of that fund towards the emergency fund. Make a monthly commitment towards the funds based on what your shortfall amount is. Create individual accounts for the accumulation of capital for an emergency fund. Channelize any lump sum inflow such as income tax refunds, etc. into an emergency fund.

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5 Reasons Why You should have an Emergency Fund

Tue, 04 May 2021 11:49:16 +0000

The Buyt Desk

How many of us ever thought in our wildest dream that we will be surrounded by a pandemic? That too twice in a span of two years. COVID-19 is that storm that has not just destroyed livelihood but lives too. It is in such difficult times you realise the importance of having an emergency fund. This is a must-have fund for bad days of life. It will not take away the pain of the situation but will definitely lessen the financial burden.

Five reasons why you must prepare for the rainy days of your life –

1) First step of Financial Planning

An emergency fund should be the most important part of your financial plan. It should be Plan A and not Plan B. Just as you start earning and before you make any investment decision you must first and foremost start building your emergency fund. Calculate your monthly expenses right from grocery to electricity bill to rent or EMI of loans that you pay. Take the estimate by imagining that if you don’t get your salary for 6 months, how will you take care of your expenses? According to experts, everyone should have an emergency fund between six times to nine times their monthly household expenses.

2)A safety net

An emergency fund acts as a safety net when you have a free fall during a bad time. It could be a job loss, accident or a sudden illness. These will be the time when you may be badly in need of funds. If you have a separate fund earmarked for unexpected expenses you won’t fall flat and this safety net will give you some financial protection.

3) Family and Friends

Yes all of us have family and friends who we trust. But when tragedy strikes you never know the family and friend upon whom you depended may also be in a bad situation. You cant be going on looking for another set of family or friends to rescue you.

4)It is not an investment

You don’t have to think that this money which you are keeping aside if invested will earn you a return. But by investing it in instruments that have a lock-in period may put you in a difficult spot when you need this money. The money of emergency fund should be kept in a manner that is available to you immediately. So holding it in your savings bank account is not a bad idea at all.

5) Real Estate or Gold is not your emergency fund

Many make the mistake of assuming that if they own a property or gold they can always sell this and arrange money. But imagine can you sell these assets easily? They are big assets and you would need buyers who are ready to make a big purchase and pay you immediately.

Life is full of surprises some good some bad and at times tragic. Do not underestimate the importance of an emergency fund and start building it if you don’t have one.

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Five questions that will help you in building your Emergency Fund

Wed, 03 Mar 2021 13:59:40 +0000

By The BuyT desk

What is an Emergency Fund?

An emergency fund is a go-to fund incase of an unseen situation of life. You need to always have a plan- B for unplanned and unexpected situations. If your regular income halts you should have a buffer money to take care of you and your family needs.

Why do I need an Emergency Fund?

Because bad times never come with an advance warning. Making an emergency fund is he most important step of financial planning. Infact before you start putting away your money into investment which ill give you return you must first and foremost keep your buffer fund ready which can keep you afloat in hard times. Don’t think that there are loans to take care of any emergencies but instant personal loans come with a very high interest rate. You may feel if not a loan then a credit card can come to your rescue. But when you pay by credit card remember you will adding more stress on your your finances by creating an additional debt.

Why does Emergency Fund need to be parked and not invested?

The emergency fund has to be literally parked and not invested. Emergencies come unannounced and this fund will be your go-to money that’s why it is important that this money is easily available to you. You should be able to withdraw the money when you need it and without any delay. At the same time, you should ensure that you do not get penalized in the form of an exit load or pre-withdrawal penalty. It should be put aside at a place where the value of the capital does not go down. You can invest where you can earn interest but remain focused on the ease of accessing the fund. Return is not the priority but the ease with which you could withdraw this fund is more important.

What should be the size of the emergency fund?

As per age, family responsibility and other liabilities, the emergency fund can be kept aside for 9 months to 1 year. Earlier it was recommended that your emergency fund should be able to help you to carry on for around 6 months but post COVID-19 experts are recommending that you should prepare a fund that should last for 9 months.

A single unmarried person without any responsibilities will have a different outlook, while the person with family and other responsibilities will have a different outlook. A senior citizen will look at other aspects while creating this fund. Nowadays a lot of family profiles are “EMPTY NESTS” – meaning children studying/staying abroad and parents alone here.

Hence we cannot generalize the quantum of emergency funds. It will differ from family to family.

Prepare two types of emergency fund- a long term fund and a short term fund. The long term fund would take care of bigger emergencies like a jobloss or a salary cut situations which could cause a longer pause on your earning. The short term fund should be kept handy for a situation that may just cro up like a loss of mobile phone or car repair.

Where to keep your emergency fund?

Emergency fund corpus should be liquid in nature. A part of it can be kept in cash at home, some in a saving bank, and some in liquid funds. Do not keep all the funds in one place. It should be available immediately or within 24 hours.

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Emergency Fund: How To Build It?

Sat, 05 Dec 2020 10:15:32 +0000

By Dheeraj Agrawal, Communication Professional

Life is full of unexpected and sudden situations- both good and bad. What else can explain this better than the present pandemic? COVID-19 taught us many lessons. Thousands and lakhs of people lost their jobs, and for many people, running family expenses became a big question. These difficult times made us understand the importance of having an Emergency Fund. This fund is not the responsibility of any government, company or organization, but of every individual.

What is the purpose of the emergency fund?

According to the Investopedia, an emergency fund is a financial safety net for future mishaps and/or unexpected expenses. Examples of such mishaps or unexpected expenses include job layoff, a sudden critical illness or disability due to an accident. In financial planning, as much emphasis is given on investing in a disciplined manner as it is on creating emergency funds. Remember that during ‘good days’, a small amount of money saved regularly helps a lot in ‘bad days’.

What should be the size of the emergency fund

The size of the fund will vary from individual to individual. It depends on several factors such as your income, lifestyle, existing debt and most importantly, your expenses. According to financial advisors, everyone should have an emergency fund between three times to six times their monthly household expenses. For example, if your monthly expenditure is Rs 50,000, then your emergency fund should be between Rs 1.5 lakh and Rs 3 lakh. Your basic needs are counted in monthly expenses, such as house rent or EMI, food, children’s school fees, essential medicine expenses, etc.

How to make an emergency fund?

This fund does not get created overnight; for this you will need to deposit money gradually. Whether it is the first year or twenty-fifth year of your job, if you have not yet started creating an emergency fund, then start it from today. But before beginning that, you must note that an emergency fund is not your investment. You do not make this for any long-term goal or to get returns. Its sole purpose is to support you in adverse economic conditions. Therefore the emergency fund should be liquid, which means that the access to this money should be quick and easy. When there is an emergency situation, the fund should be in your hand immediately. You should always remember this aspect and decide where you will keep the Emergency Fund money. Never invest your emergency fund in stocks, as their value can suddenly decrease in the event of an economic slowdown.

Where to park your emergency fund?

It is an important decision, and it will depend upon your comfort and understanding of the various investment tools. You can either choose one or more than one from the following options.

1)Savings Account

For the emergency fund, you can park at least 20% of the total amount in a saving bank account. As you can access a saving bank account fund 24×7 using a debit card, so the liquidity is excellent in this case. Though you should remember the daily limit of withdrawal through debit or ATM card. Keep in mind that this bank account should be different from your salary account.

2)Auto Sweep in Account

This is another good option for an emergency fund. Auto sweep in account gives you the flexibility of your excess money in a savings account to turn into fixed deposits, and thereby you earn better returns.

3)Fixed Deposits

Fixed deposits are also one of the good investment avenues for creating an emergency fund. But it would be best if you go for a bank FDs rather than corporate FDs. You can break your FDs at very short notice, and the liquidity condition of the emergency fund is taken care of.

4)Liquid or Short Term Debt Funds

Liquid and short term debt funds have some advantages over bank deposits. The entry barrier for these funds is low. You don’t need to save a minimum sum to get started in it, unlike a fixed deposit. Also, you can get a return in the range of 8-10% from these. When you withdraw from a fixed deposit, your bank will levy a premature withdrawal penalty, whereas there is no such cost associated with liquid funds. But, you must also check whether there is an exit load applicable in case of early redemption of liquid and short term debt funds.

5)NPS Tier 2 Account

If you have opened an NPS Tier 1 account for creating a retirement fund, then also consider opening an NPS Tier 2 account for parking your emergency fund money. The best part is that you can get as much return on it as you get in an NPS Tier 1 account. And a Tier 2 account of NPS is equivalent to the bank savings account, so the liquidity is equally good in it.

It is essential to remind you once again that the purpose of an Emergency Fund is not to get returns but to have money readily available. So you can compromise on the returns but not on the liquidity. If your expenses increase with time, then you should also increase the size of your emergency fund. You should never withdraw money from an emergency fund for your non-essential expenses. By looking at the amount deposited in this fund, you may get tempted to use it for a travel plan or buy the latest gadget, but you must refrain from doing so. Emergency always arrives unannounced, and it never gives you time to create a fund again. If you have an emergency fund, the uncertainty of job or occupation will not give you mental and financial stress, at least for a few months.

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