When thinking of financial planning, savings and investments are the most frequent ones to crop up. However, the first thing one needs to do while planning finances is create an emergency fund.
Hard times do not come with any prior warning. In case of an emergency, having a fund to fall back upon is crucial as it makes things easier. Emergencies such as a job loss means a loss of income, but still rent, EMIs, insurance premiums and tuition fees need to be paid, not to forget other mandatory household expenses.
“An emergency fund should be built up for unforeseen circumstances which can cover up for the financial deficit. One can utilise the emergency fund in case of loss of regular income (job loss), medical emergencies in the family, major one-time expenses such repair of home due to natural calamity, theft of the car and so on,” said Gautam Bhasin, Founder, Prospurts, an online wealth management, real estate, and financial services company.
The amount of emergency fund will vary as per your situation. “For salaried individuals, it should be 6 - 9 months of their monthly expenses. Self-employed professionals (Lawyers, doctors, CA's) and traditional businessmen should have at least 12 months of their expenses in emergency funds,” said Bhasin. For new age entrepreneurs, the corpus of the fund should be 18 - 24 months of their monthly expenses so they are insulated from any uneventful journey of their venture.
It is necessary to cut down on discretionary expenses like eating out or buying things you can do without. Even small amounts are important as long as they make their way to the emergency fund. “Secondly, allocate your bullet inflows - such as tax refunds, gifts, bonuses and incentives to the fund which can help it grow exponentially,” added Bhasin.
“Accessibility of funds at short notice is the key to emergency funds,” stated Bhasin. He suggested that while building the corpus, one could look at liquid mutual fund schemes which yield much higher than saving account and have tax advantage of long Term capital Gains (LTCG) post 3 years.
Alternatively, one can also opt for an Auto sweep-in Bank fixed deposits, where excess money is transferred and can be accessed anytime.
Remember that money you have in an emergency fund is not to be used for impulsive purchases or to meet regular expenses. As the name suggests, an emergency fund should be tapped into only in case of an emergency.