An emergency fund is a necessity for everyone to have, and there are different approaches as to why this is so. In order to decide the amount you should save, it largely depends on what you intend to use it for.
Generally, 4-5 months of expenses set aside in savings accounts and money market mutual funds are preferable since they are kept close to cash.
Having an emergency fund can prevent financial hardship that arises due to unforeseen instances such as a job loss, business slump, or medical costs.
To ensure you’re making the right decisions about your emergency fund and other financial matters, consider seeking guidance from a trusted Finance Consultant in Rajkot. Their expertise can help you navigate the complexities of financial planning and secure your financial future.
How much of emergency fund you need to create?
As mentioned previously, the objective is to have enough funds available to cover up to five months of regular expenses. This financial reserve is independent from your insurance protection and intended for a short time period: its greatest benefit being the peace of mind it provides. Be sure to place this emergency fund in highly liquid assets such as savings accounts, money market funds, etc.
Your emergency fund can be used in 5 key situations.
1. When you lose income due to job loss
This is quite common in the private sector. Your company may shut down or may simply find you redundant. You usually have a notice period of 3 months, after which your emergency fund kicks in if you haven’t found a job. It can be quite challenging to find a lateral job when you are at a higher level, so you may need to prepare for a prolonged job search.
2. When your business is going through difficult cycles
Due to the erratic payment cycles in your business, you are already experiencing a liquidity crunch. Things can get worse if your business is experiencing negative cycles. When you are in business, you realize that tough times are common and that it is not easy to protect your family from them. In order to ensure a smooth transition for the family, you should create an emergency fund as soon as possible.
3. Unexpected expenses crop up
Facing unexpected expenses in Rajkot? Finance Consultant in Rajkot. Unexpected expenses can take a toll on your monthly budget. You may have to spend a considerable amount of money when your car meets with an accident, or if there are urgent repairs to be done at home due to heavy rains. School deposits for your child’s education also demand upfront payments, which can deplete your emergency funds.
Even attending social gatherings such as marriage functions can cost more than the regular household expenses and cause disruption in your financial planning. However, you can always rely on your emergency fund but make sure that it is refilled immediately afterwards.
4. There is a sudden medical emergency of a loved one
It can be hard to predict medical emergencies – illnesses that may go beyond what is covered by our medical policies. Of course, there are the hospital expenses but also the costs of nursing, home care assistance, medications and equipment that can quickly add up. These expenses cannot be avoided – thus it is important to make sure you top up your emergency fund once you have used it.
5. You don’t want to disrupt your financial plan
You should have an emergency fund to ensure that your long-term financial plan does not get disrupted mid-way due to financial emergencies. This is actually quite proactive. The emergency fund should be part of your broader financial plan to make it more sustainable in the long run. It also becomes a foolproof plan as well.
After all, you need to invest the funds in liquid funds where the returns may be low. Striking this balance is crucial.
Also Read: 6 Factors to consider while selecting a mutual fund