?Better safe than sorry? ?He said, she said? the experts said and so did my innermost sources. ?Buy this, sell that, invest in this stock and you?ll double your money in a few months, prepare for the worst, job cuts are hitting the company, this industry is doomed, it?s all rubbish we are doing fine?. Earnest advice given and comments passed in your best interest. However, contradicting at times, wayward, random and all over the place- kind of reminds one of the global stock markets and financial world itself, come to think of it.

A time when one can encounter fabulous opportunities and a chance to make some serious money. If the coin falls on tails when you called heads, you could lose more than you can afford to. You could be out of work with mounting bills and see the global financial meltdown encompass your own reality before your very eyes.

The glass is half full no doubt, but leaving emotions aside, the fact remains the glass is also half empty. And, while sitting on the sidelines one can gamble as to which way the water level moves over the coming period, unfortunately, whether we like it or not, the integrated global financial systems is such, that the impact in one area affects the entire world. We all know this is another era which will be recorded and studied as to how we built financial system so large and so flawed, that it almost destroyed us all!

In such times, apart from trying to use this unique current situation to one?s financial advantage, preparing for the worst is also equally important. While this may sound like a daunting task at first, it really is much simpler than imagined. All it requires is financial management discipline, smarter asset allocation and a calculated cash component to start with.

Why do we need emergency funds?

The term ?emergency fund? is self-explanatory. The very name inspires all kinds of morbid thoughts and emotions, conjures up images which we do not wish to encounter or think about, and hence never really prepare for. While many emergencies like critical medical conditions, accidents and household repairs are always present and lurking around, times such as these add even further complications to our existence. Be it business losses, increased expenditure or being suddenly shown the dreaded ?pink slip?, expenses and maybe loans to pay, makes for an extremely undesirable place to be.

India being one of those countries that is expected to bounce back faster in such times and is a better place to be in. Economists across the world agree that the impact to the south Asian giant to of short-term in nature. This is one of the positives which one can take hope from, however preparing oneself to ride out this bad weather personally, is not only a lesson which will hold good in life, but is also the most prudent way to play the current situation. Most people may feel that their money is tied up in lucrative investments like equity and real estate. We tend to feel financially secure when we own property and flats, as well as good stocks. In such a case, the entire concept of keeping money aside in case of emergencies, or changing one?s portfolio to include highly liquid assets which are less lucrative in nature, may seem ridiculous. However, think about it-how easy is it to liquidate real estate and equity in an emergency situation especially in such times, are those assets really all you need to cover all your bases?

If the answer is a ?no?, which especially in the current scenario is truer than ever for most, then start creating an emergency fund as soon as possible.

How big should an emergency fund be?

How big your emergency fund should be is a rather personal decision to make and the amount will vary from person to person. Some of the personal finance experts around the world have shared some interesting thoughts in their books. In The Wealthy Barber , David Chilton writes: ?I?m not against emergency funds, but I do feel that $2,000 to $3,000 is much more realistic than $10,000. If you?re afraid that an expensive emergency looms in the future, establish a $10,000 credit line at your bank.? Chilton believes that most people have insurance to cover many emergencies, and $2,000 or $3,000 is enough to meet the needs insurance will not cover. In the meantime, if you need more, you can liquidate investments.

Robert Pagliarini, in The Six-Day Financial Makeover, declares that an emergency fund is the most important financial step after taking care of basic living expenses. ?Your emergency reserve is your financial cushion in case something goes wrong and you lose your job or you need access to money quickly. Your emergency reserve should consist of at least three months? worth of cash. Once you?ve saved enough for the cushion, you can [move on] to other goals.?

The Wall Street Journal?s Complete Personal Finance Guidebook says: ?How much is enough? The answer is different for different people in different situations. For those in careers with a large, ongoing demand or who have relatively strong job security, three months? worth of expenses is probably enough of a cushion. Those with bigger career demands, such as higher-paid managers and executives or couples who work in the same industry or at the same company, might want nine months to a year?s worth of expenses in the bank. Yes, that?s a lot of money to save, but financial security is a game won by the most prepared to outlast the tough times.?

Use a money market account for your emergency fund, the guide recommends, but keep several hundred dollars in cash someplace safe in your home.

In You Don?t Have to Be Rich, Jean Chatzky recommends three to six months of living expenses. Your Money or Your Life recommends six months of living expenses, but only once you?ve achieved financial independence.

In The Automatic Millionaire, David Bach recommends the following three steps:

• Decide on how big a cushion you need. Bach recommends three months of living expenses, though he believes more is better.

• Don?t touch it. ?The reason most people don?t have any emergency money in the bank is that they have what they think is an emergency every month?A real emergency is something that threatens your survival, not just your desire to be comfortable.?

• Put it in the right place. ?Not earning interest on your emergency money is almost as bad as burying it in your backyard.?

Dave Ramsey?s The Total Money Makeover espouses another approach. The very first step is to save $1,000 in an emergency fund. Then he advocates eliminating debt via the Snowball Method. Only once your debt has been eliminated does he recommend building a three-to-six-month cushion.

While most of these authors talk in dollars and refer to American citizens, the fact remains that keeping aside enough money in a bank to cover all your expenses for 6 months at least is a safe position to be in. Apart from this, having liquid assets like gold to cover one?s expenses for 12 to 18 months is an added advantage for this should enable you to ride out the worst of storms that you might encounter in life.

The Finer Points

The thing with personal finance is that it is suppose to deal with problems which are personal and specific to each person individually. So, while a financial planner can help one out to a large extent, the only way to truly make a difference in one?s financial life is by understanding and learning how to do work things out for oneself. For example, when it comes to emergency funds too, there are no hard and fast rules that are applicable and one can constantly tweak their fund to match their needs. Say you start with a default value of six months savings in your head; you can start by reaching that amount and then consider making some adjustments.

You can adjust the number of months down if you have:

• Other income: If your spouse works-and wouldn?t likely become unemployed at the same time as you, then you might be able to get by with three months? expenses. Similarly, if you have investment income, a side job, an allowance, a trust fund, alimony or child support – anything that brings in cash independent of your job – you can make a similar adjustment.

•Substantial liquid assets: If you?ve got a tidy sum in a mutual fund or a brokerage account, then you may not need as much of an emergency fund. It has to be money that wouldn?t be expensive to use, hence money in a tax-sheltered plan doesn?t count. Assets that can?t readily be turned into cash, such as real estate or a car, don?t count either. Bonds and SIPs, if easily liquidated, also make a good alternative.

You might, instead of adjusting the number of months, reduce the size of your rock-bottom expenses by the amount you expect to make in non-job-related income. This is a better option as firstly; it makes the whole calculation dependent on an accurate estimate of your non-job income. Second, it makes the calculation brittle as it changes your non-job income, and hence the final amount one should save. Instead, figuring out the minimum monthly expenses without regard to non-work income and then just adjusting the number of months is smarter. The exception would be if your non-job income is both large compared to your minimum monthly expenses and quite reliable. In that case, it probably would be best to just subtract it out of your minimum monthly expenses.

You should adjust the number of months up if you have any reason to worry that you might have trouble finding another job – if you lack credentials, for example, or your current employer is the only game in town, or you?re working in a declining field.

Where to keep your emergency fund

Keeping at least part of your emergency fund in your local bank is a good decision as this provides easy access. Especially when during emergencies there are times when even one or two extra days to move the money could cost you a lot. Apart from a part in the local bank, you can consider any of the usual suspects like a savings account, money market account, Internet savings account, money market mutual fund, fixed deposits, PPFs, and NSCs. Also stashing the money away in government bonds and securities is a good choice for it provides a steady rate of return and is easy to liquidate if the need arises.

Lastly, the main purpose of creating an emergency fund is to help you only during times of emergencies and it is not a part of our savings we use to splurge with, even if one does not foresee any apparent danger ahead is a discipline that must be kept. If 2008 has any lessons to teach, then the diversification of one?s assets, staying liquid to a certain degree, having emergency money and being prepared for worst-case scenarios and random changes of tides would be the highlight.

So let us, without forgetting the lessons of the past, start 2009 with a financial plan for safety and success.

Basic factors

The basic factor in the calculation is one month’s minimum expenses

If you have a budget, go through and strike out any expenses that you’re confident could be postponed for a few months, if necessary (entertainment, dining out, vacation travel, new glasses, new clothes, etc.).

If you don’t have a budget, make a list of:

Minimum monthly bills

This is basically all your bills that are either necessary to live or that you are contractually obligated to pay: rent or mortgage, utilities, car payment, other debt payments, etc. Depending on contract terms, you may have monthly bills that could be canceled on a month’s notice or less-cable TV, fitness club membership, and so on. If you would cancel these in the event of short-term financial crises, you can leave them off the list. Otherwise, include them.

Routine monthly expenses

This includes groceries, fuel for the car, cost of prescriptions beyond what insurance covers, etc. You can take a minimalist approach here?assume you’ll be eating lots of rice and beans–but be realistic.

Job-hunting expenses

Be sure to include all the expenses that you’d need to support a job search?your phone bill, internet access, enough money for gas (or bus tokens) to get to job interviews, dry cleaning for interview clothing, etc.

Other mandatory expenses

This would be college school fees, taxes, insurance payments (monthly share for annual expenses), etc. Add that up. That should give you your rock-bottom expenses for one month.

How to start an emergency fund

Decide how much you’d like to save

Three to six month’s living expenses, a year’s wages or a fixed amount – there are a lot of opinions about how much money you should put into an emergency fund, but the only opinion that matters is yours. Ask yourself how much you would need to have tucked away to feel secure, and make that the amount that you save in your emergency fund.

Calculate your monthly expenses

Make a list of all of your regular monthly expenses – housing costs, food, utilities, debt repayments, transportation costs, insurance and all of your other “must-pay” bills. Then, total your monthly expenses, and multiply the resulting figure by the number of month’s that you chose in deciding how much money you’d like to save.

Open an account

Once you’ve determined how much you need to save, it’s time to decide where you’ll keep your money. Since you want your emergency fund to remain fairly accessible, a savings account, money market account or short-term certificates of deposit make good sense. Any one of these accounts will give you the liquidity that you need, while still earning you some interest.

Determine how much you can afford to save

For most people, it’s going to take time to build up your emergency fund -probably even a lot of time. The important thing is that you get started today. Look over your finances, and determine how much you can afford to put towards your emergency fund each month. Even a small amount would do to start with for at least it’s a start and with time it will become easier to save money without even realizing, during which you can slowly increase that amount. .

Set up automatic deposits

Make saving easy by scheduling automatic deposits to your emergency fund. Then, sit back and watch as the balance grows month-after-month.

Payroll deduction

If you have discipline problems, there are accounts where you can have the amount deducted directly from your salary cheque, before it’s deposited into your checking account (or before your employer cuts the cheque). Treat it as a bill. Every payday, you have a list of bills to pay before you can spend any of your money on variable expenses such as gas, groceries or eating out. Well, add your emergency fund contribution to your list of bills, and pay it at the same time. This makes it non-negotiable, and then what’s left over is what you can spend on other stuff.

Reduce an expense, save it

Take a look at how you’re spending money now, and find some things that can be cut back. Magazine purchases, gourmet coffee, comic books, cable TV, gizmos and gadgets. Whatever you decide to cut back on, take that same amount and put it directly into savings each paycheck. Don’t spend it.

Double purpose account

This tip is from Trent of The Simple Dollar, who wanted to pay down his debts but still have the financial security of an emergency fund at the same time. So Trent brilliantly used a double-purpose account: he would save money in an account, and after he reached a certain minimum, anything above that amount was being saved to pay off a specific debt. So let’s say the minimum amount is $500. After you pass $500, the money being saved is for a $200 debt (for example). Once you reach $700 in your savings account, you can pay off the $200 debt completely. Repeat the process for each debt.

Keep paying debt, but to yourself

If you finish making a car payment, or paying off a credit card or smaller debt, take the amount you were paying to that debt and put it directly in savings each month. You won’t feel a difference in your budget.

Limit your access

If you are tempted to spend your savings, you should put it in an account that is hard to get to. Put your savings in a money market account or fund, and when it reaches a certain amount, roll it over into FD. You might not make as much on a FD, for example, but the point is that it’s hard to access and requires less discipline.

Stash a bonus or tax refund

If you get a huge Diwali or Christmas bonus, or a tax refund, or some other such windfall, put that directly in the bank and don’t spend it. Use it for your emergency fund.

Refinance

Refinancing your mortgage or auto loan can save you a lot of money. Take the amount you save and put it in savings.