Emergencies come unannounced. During this time, we must be prepared mentally and financially to face difficult times. Financial stability is good, but facing the tough times without hampering savings is a good thumb rule to follow. In recent times, during the pandemic people have faced severe financial crises. Many thrived through these tough times due to the emergency funds they invested in, while some struggled and realized the importance of emergency savings. Today we discuss the importance of emergency funds and why one should build an emergency fund.
What are emergency funds?
Funds that are kept as savings to be used during an emergency. These funds can be invested as Fixed Deposits, Mutual Funds, Recurring deposits, and more. An ideal emergency fund is an equivalent corpus of 6 months expenses saved monthly through salary or other sources of income. Theis investment can add to the credibility of your CIBIL score, thereby making you eligible for future loans from banks. Investors must plan their emergency fund based on their essential and lifestyle expenses as these emergency funds will help them get through tough times without hampering their lifestyle.
What is the importance of building emergency funds with a fixed deposit?
Over time Fixed deposits investments have turned out to be lifesavers when invested for an extended period. Features like easy liquidity, fixed returns, and security make it perfect to park your contingency cash. The interest rates offered by various banks differ. An investor can utilize the claim either monthly, quarterly, half-yearly, or annually. The current interest rate ranges between 5-7% approximately and differs from institution to institution.
How to plan for emergency funds?
Saving for emergency funds may not always be possible overnight. The investor can set aside a tiny monthly investment to raise a corpus parked for an emergency. Keeping a small amount from the monthly income and adding it into fixed deposits can prepare you for life’s challenges. The amount kept aside as emergency funds depends on the income and lifestyle of the investor.
How much should be invested as emergency funds?
As mentioned earlier, it is the choice of the investor to decide how much is too much. It is best to calculate the monthly expenses incurred to manage the household. Similarly, the investor should add essential expenses like estimated medical bills, fees, EMIs and more to the expense list. Based on this arrived figure a 6 months equivalent corpus should be set aside as an emergency fund.
For example, if the investor gets a monthly income of 60,000. After deducting the daily expenses and savings, if he is left with 20,000, the investor can keep aside 10,000 or 15,000 to save it towards an emergency fund.
Where should you invest in emergency funds?
Now that you have a fixed amount kept for emergency funds, it is advisable not to invest entirely in one platform. To get the maximum benefit without facing risks, investors must invest these funds into assets that offer capital safety, secured returns and are easily accessible within 48 hours during a contingency. The Fixed Deposit interest rates in India are reasonable to invest in emergency funds.