loader-img
loaderImg
back

Why You Should Build an Emergency Fund

It’s been said that “life is what happens to you when you are busy making other plans”. In other words, life is unpredictable. Emergencies can come out of the blue and impose huge financial burdens. The pandemic has shown us that even the best-laid plans can be derailed by a sudden job loss or health crisis.
Dec 2022
4 mins read
Share:
whatsappIconfacebooktwitterlinkedInemailIconinstagram
An emergency fund allows you to handle these troubles without undue stress or anxiety and without having to compromise too much on your lifestyle. It will also stop you from spending money on credit cards or borrowing funds in a pinch, which could otherwise land you in even deeper financial strife.

Things to remember before building an emergency fund:
  • Define what an ‘emergency’ means to you, so you won’t tap the fund unless it’s a real emergency

  • Park your fund in liquid instruments so you can access the money quickly in an emergency

  • Aim for a fund that enables you to maintain your lifestyle for at least 6-12 months in a crisis

  • Make it a habit – set money aside periodically rather than all at once. This will also ensure budgetary discipline and preclude overspending

  • Don’t confuse an emergency fund with your savings. Savings should be kept aside for investment and wealth creation
How to create an emergency fund

  • Budgeting for the month: Sit down with your family and work out a monthly budget. You should be able to reach a median figure that allows you to meet expenses and live comfortably. This figure will be the basis of your emergency fund calculation.

  • Sizing up your fund: The target size of your fund is (your average monthly expenses) multiplied by (your fund duration). Experts recommend keeping at least 6-12 months of average monthly spend as emergency funds. A qualified financial advisor can help you create a sizable emergency fund that is best suited to your income inflow and expense outflow.

  • Apportioning money: Once you have budgeted your monthly expenditure, you will have money left over. For example, if your take-home pay is Rs. 50,000, then around Rs. 30,000 would go towards expenses like bills, rent, EMI, debt payments, groceries, etc. Of the remaining Rs. 20,000, you could put half i.e., Rs. 10,000 into investment instruments such as mutual funds, exchange-traded funds, the stock market, etc. – avenues that will generate good returns over the long term. The remaining Rs. 10,000 can be split 60:40. i.e. you put Rs. 6,000 into your emergency fund and keep Rs. 4,000 as cash in hand.

  • Parking the fund: ‘Park’ your emergency funds in liquid financial instruments, so you’ll have easily available cash in an emergency. Instruments such as savings accounts, recurring deposits, fixed deposits and post office savings accounts will all let you withdraw money quickly with minimal paperwork.

  • Making the fund earn: Once your emergency fund is close to your target, you can make the money earn for you. Speak to a financial advisor about parking a smaller portion (e.g. 40%) of the fund in the liquid instruments, and a larger portion (60%) in something like a liquid mutual fund, which delivers higher returns.

  • Apportioning lump sums: If you get lump sum amounts such as a salary bonus or a cash gift, divide that too, such that a larger portion goes into your emergency fund and a smaller portion can be used to treat yourself and your family – as a reward for your fiscal discipline.
Once your fund is set up, just review it periodically in consultation with your financial advisor – and then sit back, relax and enjoy the peace of mind you’ve just bought for yourself!
Share:
whatsappIconfacebooktwitterlinkedInemailIconinstagram
WANT TO KNOW MORE?
PGIM India Asset Management Private Limited
(CIN - U74900MH2008FTC187029)
Toll Free Number: 1800 266 7446
Email: care@pgimindia.co.in
This is an Investor Education and Awareness Initiative by PGIM India Mutual Fund.
All the Mutual Fund investors have to go through a one-time KYC (Know Your Customers) process. Investor should deal only with the Registered Mutual Funds (RMF). For more info on KYC, RMF and procedure to lodge/redress any complaints, visit https://www.pgimindiamf.com/ieid.
MUTUAL FUND INVESTMENTS ARE SUBJECT TO MARKET RISKS, READ ALL SCHEME RELATED DOCUMENTS CAREFULLY. Read more
The information contained herein is provided by PGIM India Asset Management Private Limited (the AMC) on the basis of publicly available information, internally developed data and other third-party sources believed to be reliable. However, the AMC cannot guarantee the accuracy of such information, assure its completeness, or warrant such information will not be changed. The information contained herein is current as of the date of issuance* (or such earlier date as referenced herein) and is subject to change without notice. The AMC has no obligation to update any or all of such information; nor does the AMC make any express or implied warranties or representations as to its completeness or accuracy. There can be no assurance that any forecast made herein will be actually realized. These materials do not take into account individual investor's objectives, needs or circumstances or the suitability of any securities, financial instruments or investment strategies described herein for particular investor. Hence, each investor is advised to consult his or her own professional investment / tax advisor / consultant for advice in this regard. The information contained herein is provided on the basis of and subject to the explanations, caveats and warnings set out elsewhere herein. The views of the Fund Manager should not be construed as an advice and investors must make their own investment decisions regarding investment/ disinvestment in securities market and/or suitability of the fund based on their specific investment objectives and financial positions and using such independent advisors as they believe necessary.
icon
icon
icon
icon