The concept of saving for a rainy day is ingrained in us from a young age. However, we often take it seriously only after experiencing a financial crisis firsthand. The COVID-19 pandemic served as a wake-up call for many, underscoring the importance of having a financial cushion. Since economic uncertainties are unpredictable, an emergency fund is essential for financial security.
An emergency fund is a highly liquid investment or cash reserve accessible at short notice. While cash is useful for immediate needs, long-term financial resilience requires investment in instruments that offer steady growth and easy redemption.
An emergency fund offers financial stability during unemployment, market downturns, pandemic-like crises, and other unexpected challenges such as medical emergencies and sudden travel needs.
– How Much Should Your Emergency Fund Be?
Wealth Advisors recommend building an emergency fund that can cover at least six months of essential expenses. However, the ideal size varies based on several factors:
1. Number of Dependents:
– If you are single, your fund should cover rent, food, and other essentials.
– If you support a family, include additional expenses like education and healthcare.
2. Job Profile:
– Jobs in volatile industries (e.g., aviation, hospitality, auto) require a larger emergency fund.
– Stable government or corporate jobs might require a smaller buffer.
3. Health Risks:
Medical emergencies can arise unexpectedly. While health insurance helps, an emergency fund ensures additional coverage for unforeseen expenses.
4. Existing Loans:
– If you have EMI commitments for home or car loans, your fund should account for these payments to prevent financial strain during income disruptions.
– Where to Keep Your Emergency Fund?
Accessibility and security should be top priorities when choosing where to park your emergency fund. Consider these options:
1) Cash and Bank Deposits
– Always keep some cash in hand for immediate access.
– Maintain at least 25% of your emergency fund in a savings account, which offers 6-7% annual interest.
– Fixed and recurring deposits provide slightly higher returns but may have withdrawal penalties.
2) Liquid Mutual Funds
– Liquid funds typically offer 1-1.5% higher returns than savings accounts, and sometimes even more.
– Easily redeemable, with funds credited within 24–48 hours.
– Arbitrage funds offer another low-risk option, leveraging stock market volatility for returns.
3) Gold Funds
– Investing in gold funds avoids the high transaction costs of physical gold.
– However, gold prices can be volatile due to forex and global market fluctuations.
– SIPs in gold funds allow accumulation over time while reducing the impact of price volatility.
– Emergency Fund Strategies by Age Group
1) Millennials (25-30 Years)
– Can afford a higher-risk profile by allocating more to mutual fund SIPs.
– SIPs with a low entry amount (₹500) are accessible, even for gig workers.
– Cutting minor discretionary expenses (e.g., fewer outings) can help build the fund steadily.
2) Modern adults (31-39 Years)
– Higher responsibilities require a diversified emergency fund.
– Equal allocation across savings accounts, mutual fund SIPs, short-term debt funds, and gold funds ensures stability.
– A robust health insurance policy is essential to avoid relying heavily on emergency savings.
Building an Emergency Fund with Smart Investing
Emergency Fund Planning is essential for a stress-free life. A well-structured emergency fund, complemented by adequate life and health coverage, enables you to allocate the rest of your investments toward high-return opportunities, fostering wealth creation. Many a times your ideal funds are spread across various accounts. Thus, it is important to keep it in an account which yields at least 6-7% returns. Effective planning not only provides financial security but also accelerates wealth-building. Establishing financial goals through SIPs or lump sum investments ensures a solid safety net against future uncertainties. By starting early and diversifying strategically, you can build resilience and confidently navigate unexpected challenges.
To understand more on the topic as well as to start investments please feel free to contact us:
Phone: +91-9324609115
E-mail: team@richvikwealth.in
The article is authored by CFP Madhuri Nandwani from Team RichVik.