Money*

Reader's Digest (India) - - Contents - BY MAMTA SHARMA

Have you planned for an un­ex­pected cri­sis that might need im­me­di­ate cash at hand? Also known as “con­tin­gency fund,” it is money to get through a job loss, med­i­cal emer­gency, or other un­planned ex­pense, so that it does not dis­turb your long-term fi­nan­cial goals or get you into debt.

How much? That would de­pend on your needs and reg­u­lar ex­penses. If you are salar­ied, your fund must ide­ally cover up to six months’ ex­penses. If self-em­ployed, look at one year’s.

How to build it First, as­sess all in­come and ex­penses. Once you ar­rive at a fig­ure for your emer­gency fund, start with sys­tem­at­i­cally set­ting aside small amounts monthly. Don’t wait to place a lump sum. Iden­tify one or two ex­penses that you can do with­out. This will in­crease sav­ings.

Where to keep it The fund must be eas­ily ac­ces­si­ble. It must earn and grow. It must also be in­vested very safely. Don’t keep part of it as cash at home if you have ATM ac­cess. Opt for a sav­ings ac­count with a big bank that of­fers a higher rate of in­ter­est than the nor­mal 4%. Never use small-time pri­vate non-bank­ing in­sti­tu­tions that of­fer high rates—you may lose all the money. A “flexi” or “sweep-in” ac­count with your bank of­fers you the op­tion to with­draw money with­out penalty and earn fixed-de­posit in­ter­est rates as well.

Liq­uid mu­tual funds—another op­tion—en­ables you to with­draw partly or liq­ui­date it at short no­tice, and any div­i­dends you get are taxfree. Gold coins or bars (not jew­ellery) are another op­tion—buy them when gold prices dip. Gold usu­ally ap­pre­ci­ates in value over long years, and can eas­ily be sold. You could have a com­bi­na­tion of all or a few of th­ese. Don’t touch your emer­gency fund till you re­ally need to, al­ways ac­count­ing for it sep­a­rately from your other in­vest­ments. And what if you will never use your emer­gency fund? You couldn’t be luck­ier!

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