As the name suggests, an emergency fund is a fund that you build for yourself that will help you in time of an emergency. One of the most crucial components of financial planning is planning for risk, precisely what an emergency fund is for. The recent Covid-19 pandemic has made many us realise the importance of maintaining such a fund.
Why Do You Need an Emergency Fund?
An emergency fund comes in handy in situations like a job loss, an accident, theft etc. While we take all necessary precautions to avoid such cases, we must also prepare ourselves for such situations. Financial institutions or banks do not offer an investment option called an emergency fund. People have to save and invest their money in a separate account and treat it as an emergency fund. This means that you should commit to yourself that you will only use this money in case of an emergency. What you consider an emergency is totally up to you. An emergency fund is money that you save for yourself to use in times of a crisis.
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Where to Invest?
Since, at time of an emergency, you will need access to this money instantly you must make sure that you invest it in a highly liquid asset like a fixed deposit, savings account, recurring deposit etc. You must not invest this money in a PPF or real estate. You must also make sure that you support this money in an investment instrument that is not volatile and ensures capital protection with a stable interest rate. If you invest this money in the stock market or gold, then you might have to withdraw the money at the time of a correction when your investment might not be giving a good return.
If you are interested in learning why you should build an emergency fund, check out our blog on Five Reasons Why You Should Make an Emergency Fund.
How Much Money Should You Keep in an Emergency Fund?
Suppose you have a stable and secure financial life with your income highly exceeding your expenditure, low or no debt, decent interest income. In that case, you might be okay maintaining at least three months of your living expenses in your emergency fund.
If you do not have a healthy financial status at the moment, then you should first secure yourself and build an emergency fund with at least six months worth of your living expenses. Some people tend to take a highly conservative stand and even save up to 9 months of their living expenses in their emergency fund.
To conclude, an emergency fund is one of the first things you should focus on when you begin your financial wellness journey. It is good to strive for financial independence and build a huge investment fund, but it is essential to focus on becoming financially secure first.
Wizely is committed to helping you on your financial wellness journey and wishes you the best in your financial journey!
Follow our 'Emergency Fund' Blog Series:
Five Reasons Why You Should Make an Emergency Fund
How Wizely Can Help You Build a Robust Emergency Fund
