Fin Quest

An emergency fund is spare cash that is used during personal financial distress. Events such as the loss of a job, an illness, or a recession are examples of when many individuals would need to use their emergency fund to continue to survive. Thus, the primary purpose of the fund is to meet emergency expenses during unforeseen circumstances. By doing so, it reduces the need to borrow debt at high interest rates or to utilize one's retirement funds. Ideally, the emergency funds should be 3-6 months of expense and growing of emergency fund should be the utmost priority. These stash of money helps in covering the financial surprises which can be costly and stressful. It is an essential corpus that must keep aside to tackle emergencies.

Helps to keep your stress levels low:When you have an emergency fund, you tend to have a relaxed and stress-free life. This is because you know that you have a back-up plan in place in case things go south or an emergency pops up.

Ensures that you do not redeem from your future savings: Your savings are linked to some very important future goals. An emergency fund helps you to achieve your future dreams by meeting your urgent needs so that you donâ€™t have to tap into your long-term investments.

Ensures that you do not fall into a debt trap: During financially challenging times, emergency funds can help you stay afloat without having to rely upon loans or credit cards. Emergency funds, thus, ensure that you do not fall into a debt trap during a financial crisis.

Peace of mind: The most important part about emergency funds is that it gives peace of mind. A solid emergency fund can reassure that can manage unforeseen expenses and hence focus on the current work and also improve in other areas of life as well by minimising financial stress.

Depending upon the income and expenses, the right "emergency" amount depends on the financial position. A good thumb rule states that the ideal amount for your emergency funds should be at least three to six months of the living expenses.

Long-term emergency funds:

This is where funds can be saved for large-scale emergencies like a major natural disaster or a sudden medical emergency. This fund should be invested in instruments that allow earning a slightly higher rate of interest but may take a couple of days to liquidate.

Short-term emergency funds:

This is the fund that rushes to in cases of emergencies. Such a fund should offer little in terms of interest but allow immediate accessibility, which in case of extreme situations can suffice till they gain access to long-term emergency funds.

Emergency funds calculation:

- Jot down the monthly income.
- Determine the monthly expenses.
- Determine the monthly amount spent on recreational activities.
- Evaluate the amount spent on travel It includes fuel, public transport etc.
- Calculate the monthly amount spent on dependants.
Redemption of Emergency fund:

- As far as liquidity is concerned, many liquid funds allow instant redemption of up to Rs.50, 000 or 90% of the invested amount.
- Redemption can be done at any time. They will credit the money to linked bank account instantly. Check for this instant redemption facility before investing in a liquid fund to make sure the fund house allows it.
- By this way, spread the emergency fund across different avenues, and ensure quick accessibility while enjoying high returns.