It is the readily available saved amount of money that can be accessed by an individual, in times of a crisis. The unpredictable nature of life compels us to think of the future. Especially, during a situation like a job loss, medical crisis, war, and pandemic, the thought and action of creating an emergency fund is an essential safety net for an individual and family. It usually covers the basic necessities required for livelihood for at least a time period of 12 months. When in dire need, a person should be able to resort to his savings and investments which should have the quality of liquidity, for fulfilling the sudden requirement of cash.
Essential Components of Emergency Fund
Liquidity, security, and accessibility are the three main considerations to be kept in mind during the creation of an emergency fund. Liquidity is required because of unpredictable situations where sudden money would be needed. Then again the emergency fund should be kept, invested, or saved in a secure place where there is no inkling of a risk. Moreover, during a crisis, the sudden requirement of cash necessitates the emergency fund to be kept in an easily accessible place, whether it be home, savings bank account or liquid mutual fund, and others.
The amount of money saved or kept aside for emergency purposes needs to cover the 12-month basic expenses of a household. It depends on factors like the salary, number of dependents, medical issues, and the general standard of living. The amount should be such that it includes fixed expenses like rent, school fees, the salary of house helpers, etc, and variable expenses like food, bills, medicines, etc.
Plan of Action for Emergency Fund :
- To set aside a certain amount of money from salary or profits every month for an emergency fund.
- To use tax returns for emergency funds and not to be used for consumerism.
- To prepare for achieving the aim of saving the required amount for emergency purposes.
- To save any extra amount of money through a windfall for an emergency fund like for example a salary bonus, any monetary gift on festivals & occasions, winning a cash amount in a contest, etc.
- To make use of the automatic transfer of money to the savings account dedicated to an emergency fund.
- To create a separate bank account for an emergency fund so that temptation to spend from that amount can be curtailed.
- To keep a track of the contributions made to the emergency fund.
- To make a habit of saving and cutting down on unnecessary expenditures.
Places to Save and Invest
The money accumulated for an emergency fund should be kept in a Savings account, or invested in liquid mutual funds and also a certain amount of cash can be kept at home. It is best not to invest money where liquidity would be a hindrance. Also, high-risk investments like buying or selling shares are not recommended. The ideal plan should be to keep the money for an emergency fund is different places like a separate savings account and in other investments that can be accessed in times of crisis.