SOURCE : NEW18 NEWS
Last Updated:April 21, 2025, 16:24 IST
An emergency fund is a dedicated reserve of money set aside to cover unforeseen expenses or financial emergencies.
The ideal emergency fund depends on various factors including your lifestyle, number of dependents, job stability, and monthly expenses. (News18 Hindi)
In personal finance, few things are as crucial as having a solid emergency fund. It acts as your financial safety net during unexpected life events — job loss, medical emergencies, or sudden home or vehicle repairs. But, how much should you really keep aside? And where exactly should you park this money for easy access and safety? Let’s break it down.
What Is An Emergency Fund?
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An emergency fund is a dedicated reserve of money set aside to cover unforeseen expenses or financial emergencies. It is not meant for planned spending like vacations or gadgets, but for real crises that could disrupt your financial stability.
How Much Emergency Fund Do You Need?
The ideal emergency fund depends on various factors including your lifestyle, number of dependents, job stability, and monthly expenses. However, the standard recommendation is:
Salaried Individuals: Set aside 3 to 6 months’ worth of living expenses.
Self-Employed or Freelancers: Target 6 to 12 months of expenses, since income is often irregular.
Retired Individuals: Keep at least 12 months of essential expenses, possibly more if you rely heavily on market-linked instruments.
Example:
If your monthly expenses (rent, groceries, EMI, insurance, etc.) are Rs 50,000:
A 6-month emergency fund = Rs 3,00,000
A 12-month emergency fund = Rs 6,00,000
Factors That May Influence the Amount
Health conditions: Chronic illnesses may require more funds.
Dependents: More family members mean higher emergency needs.
Job security: High-risk professions may warrant a larger cushion.
Insurance coverage: Adequate health and life insurance can reduce emergency fund requirements.
Debt obligations: Those with high EMIs need bigger buffers.
Where Should You Park Your Emergency Fund?
The key characteristics for an ideal emergency fund parking spot are liquidity, safety, and minimal risk. Here are the best options:
1. Savings Account
Pros: Highly liquid, safe, insured up to Rs 5 lakh by DICGC
Cons: Low interest (2.5%-4%)
Best For: Keeping at least 1 month of expenses for immediate access
2. Fixed Deposits (with sweep-in option)
Pros: Slightly better returns than savings accounts; safe
Cons: Penalty on premature withdrawal (unless sweep-in enabled)
Best For: Parking 2-4 months of funds
3. Liquid Mutual Funds
Pros: Returns higher than savings accounts (nearly 5-6%); redemption in 1-2 working days
Cons: Market-linked, though with low risk
Best For: Storing bulk of emergency funds not needed immediately
4. Auto Sweep Savings Accounts
Pros: Combines savings + FD benefits; auto-breaks FD for withdrawals
Cons: Limited to partner banks and thresholds
Best For: Passive savers who want returns + liquidity
5. Short-Term Recurring Deposits
Pros: Encourages discipline, guaranteed returns
Cons: Less flexible during emergencies
Best For: Building the fund gradually
Where NOT to Keep It
Stock Market/Equity Mutual Funds: Too volatile for emergency funds
Real Estate or Gold: Illiquid during emergencies
Long-term FDs with lock-in: May charge penalties and reduce access
How to Build an Emergency Fund?
According to personal finance experts, set a goal based on your monthly expenses.
Start small – even Rs 2,000-5,000 per month adds up.
Automate savings through ECS or standing instructions.
Review annually – Adjust the fund as your life stage or expenses change.
Should You Use Your Emergency Fund for Everything Unexpected?
According to an expert, “Use this amount only for real emergencies like medical emergencies, job loss or salary delays, urgent home/car repairs, or emergency travel.”
Avoid dipping into it for weddings, planned travel, or impulse shopping. That’s what sinking funds or budgeted savings are for, he added.
