Do we need to maintain an Emergency Fund?

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‘Emergency fund’ – the name itself suggests it is the Fund / Money kept aside to meet money requirement during emergency situations.

What are the emergencies?

A sudden loss of job / layoff, accident causing severe injury forcing you to be on bed for long time, change in Financial situation due to certain unforeseen incidents, ill health of elders resulting in requirement of more Funds than expected etc.,

Some of us have huge EMIs going on, which will be difficult to manage incase of any of the situations stated above.

Hence, it is prudent to maintain atleast 4 to 6 months expenses incl. EMIs as an emergency fund to safe guard against unforeseen incidents.

Now, where should we save / put this emergency fund / money. One option is to maintain it in the Savings Bank Account. But the interest rate is only 4% and there are chances that we will use it for some other purpose other than the intended emergency fund purpose since it is easily accessible.

One good option to manage emergency fund money is to invest it in a Liquid Fund offered by Mutual Funds. Liquid Funds offer interest rate of ~ 7 – 8%, which is higher than that of Savings Bank Account. Money can be withdrawn from a Liquid Fund in just 1 day. We will not touch the money invested in a Liquid Fund since it is a different investment and not available for ready usage unless sold deliberately.

Conclusion:

Try to accumulate atleast 4 to 6 months expenses (incl. EMIs) in a Liquid Fund over a period of time to safeguard against Emergency situations.

The money invested in a Liquid Fund gives interest @ 7 – 8%. The interest component can be withdrawn as required or left in the Liquid Fund.

Interest will also earn interest….principle of compounding.

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