How to maintain an emergency fund? 5 things to know

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Published: February 16, 2017 12:56:47 PM

Financial planning involves maintaining an emergency fund, which means everyone who is earning and also have dependents, should keep some amount secured to meet a sudden demand. If by any chance some mishap happens to you in the future and you require instant money to pay – like hospital bills, household bills, etc

emergency fund, money, investment, liquid funds, liquid, savings, financial planningMaintaining an emergency fund is different from doing investments in various products to meet your financial goals. It should be treated in a different way.

Financial planning involves maintaining an emergency fund, which means everyone who is earning and also have dependents, should keep some amount secured to meet a sudden demand. If by any chance some mishap happens to you in the future and you require instant money to pay – like hospital bills, household bills, etc – then in that case your emergency fund will meet your needs.

Maintaining an emergency fund is different from doing investments in various products to meet your financial goals. It should be treated in a different way. Financial advisers suggest keeping at least 3 to 6 months of your expenses as your emergency fund with you all the time whether you require the same or not. As your expenses increase,, you should increase your savings also in the same proportion.

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The emergency fund follows the different principles savings. It is done in order to make the best use when you are in necessity. Here are a few principles which need to kept in mind while doing savings for an emergency fund.

It has to be safe

Whatever amount you are saving for your emergency fund should be done safely. Whether keeping your money in a locker or keeping anywhere in your home should be protected and not be used by anyone in any case other than if there is an emergency. After all, when you are in an emergency, you would always want to have emergency fund along with you.

It has to be Liquid

Liquid means where you get cash on quickly basis. Savings account and cash in hand are the best modes of keeping money in a liquid form. Other than that you may keep money in liquid funds which are although not as best as a savings account but can offer you more return on your emergency savings. Investing money in real estate for maintaining emergency fund is not a good option at all because it cannot provide you instant cash and moreover selling a property involves lots of tax implications too.

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Low volatility

If you are planning to save emergency money by investing your money to earn better returns till the time you are not making the use of it then it is a better option but before that try to make an investment in such funds which are not prone to market volatility or not even depend upon the market volatility. You can maintain your emergency funds in instruments like fixed deposits, payments banks, liquid funds but avoid doing saving in equity funds because redemption of money generally takes T+3 days. Moreover, if you are taking out the money within a year you may be levied with heavy tax implications under short-term capital gains. Also do not maintain your emergency fund in gold or rare metals because they are highly volatile in nature.

It has to be insured

The amount you are saving for your emergency fund should be properly insured. This means keeping your money at home may not be that much secure as keeping it in your bank account. For instance, your house catches fire and all of a sudden you need to be out of it. Having cash in a house, in that case is of no use because you cannot make the use of it in any case. Likewise, many banks are insured under DICGC where each depositor in a bank is insured upto a maximum of Rs 1 lakh for both principal and interest amount held by him.

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It should provide returns

Keeping cash uselessly will never create wealth. It will remain the same even after ten years. And if demonetisation comes in between, then even that money will have no further value. So always keep in mind that in whatever form you may be saving your money you should always try to generate some returns over it so that even if you are not using it, you are creating wealth from the same. If your emergency need is not increasing as per your monthly expenses, then also you can use the profit part for buying valuable things for you family.

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