People are always advised by experts to have an emergency fund, especially for a crisis like a job loss or pay cut amidst a pandemic like the current one.
An emergency fund or contingency fund is a specified amount set aside for unexpected emergencies that might arise. For instance, medical emergencies that are uninsured, temporary job loss, unexpected travel due to family emergencies, etc.
With emergency funds, the thumb rule is to accumulate a minimum of 3 to 6 months’ basic salary. The emergency fund should cover expenses such as rent, food, loan EMIs, education fees, utilities, insurance premiums, etc. for a few months. Even though a corpus of a minimum of 3 to 6 months’ basic salary is suggested, in reality, there is a possibility that some might require a bigger emergency fund, under such situations that we are facing right now.
The amount of emergency funds needed for an individual depends on various factors, such as the person’s nature of employment, dependents, earning members in the family, other investments and insurance, etc.
For instance, if an individual has safe employment with no fear of job loss, then one can plan a smaller pool of funds of up to 3 months’ expenses. But if they are part of a sector that is prone to layoffs, then he/she should plan for a bigger cushion in terms of emergency funds. That way one can adjust one’s emergency fund and opt for something like 6-9 months or even up to 12 months’ basic expenses, which should be considered in such a case.
Additionally, if there is more than one earning member in the family, then the risk is low for one individual, hence, having a 3-6 months’ pool will be enough. However, in the case of a single earning member of the family, it is better to first start with a 6-month emergency fund and then gradually keep adding more to it and increase the fund to 9-12 months.
Furthermore, in case of aging parents/in-laws, children who are dependent on the bread-earner, the pool has to be bigger. Especially in case of medical complications, where a health insurance policy might not suffice.
These are just a few main factors that need to be considered. According to experts, having an emergency fund in one’s portfolio is of utmost necessity, and checking the adequateness of an emergency fund regularly should be done.
Note that, while investing your emergency fund money, returns from the emergency fund isn’t the main factor – keep it as liquid as possible, keeping in mind its safety. It should be kept under the mix of savings account, bank FDs and liquid funds.