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!