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Your Emergency Fund Is Utterly Useless If...

There is no denying the importance of an emergency fund. These are highly uncertain times. Job loss, accident, natural disaster, medical emergency, car breakdown, etc. can happen to anyone, anytime, anywhere. And such unfortunate incidents may require large sums of money that can upset our financial balance.

Having money handy to meet such unforeseen, irregular and unexpected expenses
- spares us the mental agony of arranging money at a very short notice
- protects our long-term investments from such shocks and
- gives us time to realign the long-term finances in line with the new financial realities, if need be.


But, like many other financial maxims... such as to save for the retirement, not be greedy for super-normal returns, to keep away from credit cards etc... this one too sadly remains just on paper.

Your emergency fund is utterly useless if...


...if it doesn't have the "right" corpus
Of course, there is no formula to calculate the perfect emergency corpus. It depends a lot on our financial position. Having said that, anything between 3 to 6 months of our average monthly expenses, including EMIs is likely to be sufficient to tide over short-term difficulties. It offers us that all-important breathing space to assess the damage and take right decisions going forward.

Too less an amount will defeat the very purpose of such a fund. And too large a fund would mean loss of opportunity to invest it for higher returns. Therefore, finding the right balance is essential.


emergency-fund
To maintain its efficacy, keep a watch on your Emergency Fund too.

... if you don't park it in the "right" products
Needless to mention, this money should be readily available. Therefore, it cannot be invested for long periods or in instruments where it is difficult to withdraw. So PPF, NSC, ELSS, insurance types of investments are ruled out. But we also can’t leave it idle in a savings account where its earns a mere 4% interest. 

Most banks offer a FD-linked savings account. Herein the money is kept in an FD, but can be withdrawn anytime we want to; even through the ATM card or by issuing a cheque. We can take advantage of this facility by keeping this amount in a 1-year FD, where we also earn decent interest today.  Another alternative is short term debt funds. Thus we can enjoy the benefits of both returns and liquidity.


... if you don't "review" and "replenish" it
As time passes, the nature and quantum of our expenses will change. As our children grow, the expenses on their education will rise. But later as they start earning, our expenses will reduce. When we are young, we spend very little on medical needs. But as we grow older this becomes a significant part of our expenses.

Therefore, we must review our emergency corpus every few years and check whether we are under-protected or over-invested. Accordingly, from time to time we need to add money to the fund or take out from it.  In addition, if we have to ever use these funds for any emergency, we must ensure to replenish it again as soon as we can.  


Make sure that you too are ready to face the rainy day with peace and equanimity. In the meantime, be aware of these '6 Ways to Raise Money in an Emergency'.


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