Emergency funds as the name entail cater to sudden and unforeseen financial exigencies arising from a range of unexpected situations viz. job loss, accident, major illness, natural calamity, etc.

Thus the nature of these emergencies can be short-term or long term in nature, but the need for availability of such contingency funds is immediate when the need may arise.

An emergency fund not only helps you tide over your critical financial needs in your most difficult times; it also ensures that your investments for other long term financial goals remain undisturbed.

Such is the importance of building and/ or having a contingency fund at your disposal. But remember, an emergency fund is usually not meant to fund daily expenses of life unless emergent from unforeseen circumstances. 

 

In this article, we will focus on all the things you need to know about emergency funds for you to plan and manage your finances prudently.

We aim to cover– 

  • The reasons why you may require an emergency fund
  • Types of financial emergencies
  • The right amount of money to keep in your emergency fund account
  • How to Build an Emergency Fund? 
  • Different instruments available to build emergency funds in India
  • Benefits of having an emergency fund

 

The reasons why you may require an emergency fund:

For all of you who have witnessed and are still experiencing the wrath of the landscape scale Covid-19 pandemic for the past eighteen months, you are sure to have witnessed the worst emergencies so far in your life, either in the form of pay-cuts, job loss, death of a family member, natural calamity, etc.

Medical emergencies, job loss and natural calamity if faced call for immediate requirement of money and here is where your emergency funds come to rescue.

You must keep in mind that your emergency fund is kept liquid in nature, such there if met with a financial crisis, you can avail of the money without delay.

Neither should withdrawal from the fund cost you an exit load or withdrawal penalty. This is the most critical feature of emergency funds that you must keep in mind when deciding on your investment vehicle to save for emergency

 

Types of financial emergencies:

Emergency savings may be required to mitigate a range of financial emergencies that can be classified into –

  • Small/ Short-term emergencies
  • Big / Long-term emergencies

 

Small/ Short-term emergencies entail but are not limited to – 

  1. Accident of personal vehicle on the roads or breakdown at home
  2. Unplanned and emergency family travel (inter-city) to give care to a sick parent/ elderly family member or attend a family funeral
  3. Home/ office repair work to be undertaken post a natural calamity like floods/ very severe cyclones
  4. Medication and/ or minor surgery required for unique illness not covered in medical insurance policies
  5. Major robbery or theft during the journey or at home 
  6. Pet emergencies/ accidents that require professional vet care
  7. Business slowed down due to prolonged periods of lockdown owing to a pandemic situation where payments are also held up

 

Big/ Long-term emergencies may include but not limited to –

  1. Long periods post-job loss/lay-off
  2. The medical condition of an immediate family member that requires your 24×7 attention and care
  3. Medical condition for self that may require a sabbatical from your work
  4. Major damage to house due to a natural catastrophe
  5. Unforeseen and unplanned education fees for children to ensure ‘golden career opportunities are not lost

 

There will still be a section of people who may feel that while the concept of emergency funds is great, and is good for all others; but you do not need one just now as –

  • Maybe you do not need to shoulder any financial responsibilities at home at the moment
  • The family is financially stable as the father is still earning and has the family finance sorted

 

You may also think that just in case if at all, a financial emergency occurs, you will have the credit cards that you can swipe and meet your expenses and use your 45 days interest-free period to further plan balance transfer on other cards till you tide over the crisis.

Believe you in me, when crisis strikes, it is not easy to maintain such calm and composure to calculate and play with such high interest revolving credit. You might be putting too much at stake.

You might also be thinking that you are highly skilled in a niche job; demand for which is always high in the market.

That gives you a notion that in case there is still a chance of job loss, you will easily be able to find one.

In that case, I would urge you to consider the following before you choose not to invest in emergency funds.

  • What if the country faces a major economic downturn and/ or enters into a recession and your job is no longer in demand leading to a job loss?
  • What if your company gets merged or acquired by a larger company and the department you are a part of is now redundant resulting in your lay-off?
  • What if your parent in the home country gets paralysed or becomes immobile due to a major accident and you need to travel back as the caregiver and sole companion for your lonely parent?

 

Yes, sooner or later in life, everyone faces financial emergencies that need serious attention and makes emergency savings a critical part of financial planning.

To understand and get further clarity on the subject, we urge you to take a quick financial planning course from Koppr to make a conscious money decision.

 

What is not a financial emergency?

I would also like to highlight here some of the situations that definitely does not consist of or should never be considered as a financial emergency and you must not lay your hands on the contingency fund you have created for them.

For example –

  1. You badly need to invest some money into your business for a deal you are looking forward to. This is because you should have had provisioned for future business opportunities from your earlier profits alone.
  2. You or your family member wants plastic surgery to enhance your facial beauty.
  3. Being an ardent football fan, you have got a great deal on vacation travel to watch the EURO CUP finals on 12 July 2021 and wish to avail of it. 
  4. You have been invited to a destination wedding and you decide to fly at the last minute
  5. You have a sudden desire to change your home flooring to a complete wooden  makeover
  6. Replace your HD TV with a high end large smart TV of the latest model to offset the inability to go to movie theatres, courtesy of the pandemic.  

 

The right amount of fund to keep in your emergency fund account

Emergencies as we saw can come in ways more than one and can range from a big one like a job loss to a small one like your family car breakdown.

In most cases, you may have noticed that misfortunes, when they strike; strike hard and in a series – so don’t be surprised if you can have a car breakdown when you don’t have a job too among other losses/ exigencies! Whatever the situation is, you will have to ensure that your living expenses are seamlessly met even when you don’t bring home an income for several months.

And, you will still have to pay your investment EMIs, loan EMIs along with credit card dues without a worry. 

You will find some extreme cases as well; where some people are seen to account for their luxuries like an annual vacation as well while planning to save for emergency, while some others trim their budgets and stick to bare-bone living expenses budget to tide over the crisis times. 

So to start with, make an exhaustive list of living expenses for any month and prioritise the key (must have/ need to) expenses that you must account for to seamlessly tide of the crisis period.

You would need to take a call whether to consider one or two small ‘to haves’ in the list depending on your current financial/ job status and affordability.

 

Though most of the financial advisors/ planners would suggest keeping aside 3 to 6 months of your living expenses in and as your emergency fund, it will be prudent to set aside and build an emergency corpus that consists of 6 to 9 months of your living expenses.

This suggestion stems from the widespread experiences we are witnessing courtesy of the Covid-19 pandemic since the beginning of 2020.

Even the Subprime Crisis during 2007 – 2008 had witnessed prolonged periods of job loss for the salaried class if you remember. 

 

How to Build an Emergency Fund?

Just as Rome was not built in a day, your emergency fund needs time to build gradually.

You will need to set aside a certain amount of money into a separate account every month, and soon in some time, you will find a considerable corpus built. 

 

Wondering how much money to save for emergency? Say, the modest monthly living expenses that you would like to maintain in the face of financial exigency is INR 15000 at any point in time.

So you will need a corpus of at least INR 90000 or INR 135000 if you aim to build a provision for 6 or 9 months respectively.

You can decide on the amount you want to set aside every month towards your emergency savings depending on your choice and intent – you may choose, say, for example, INR 5000 or INR 10000 a month to build your contingency corpus.

You may choose to cut down on your ancillary expenses or even small investments for a while, to build this all-important emergency fund.

 

Different instruments available to build emergency funds in India

Time is now to think about where to invest for emergency funds.

While deciding where to invest in emergency to build the desired corpus you must keep in mind a few things like;

  1. The fund must help you without hassle when you need it the most and must easily convertible into cash without any delay. 
  2. While some emergencies give you a few hours and maybe a couple of days to get prepared, others can be ‘right here – right now’ kinds, so you must invest accordingly.
  3. Thus the investment options you decide on must be highly liquid to ensure you or even your representative/ chosen family member/ friend can access the money if and as required.
  4. The money must be easily accessible such that it gets transferred to your account preferably within the same working day.
  5. The investment avenue should get you decent returns as well.

 

a) A separate savings bank account:

The easiest option is to open a separate bank account in your chosen bank and keep depositing a specified sum of money into that account through auto-debit mode.

This will ensure forced saving without missing out on a monthly deposit you committed to making to save for emergency


Below is the list of banks offering the highest rate of interest on a savings account as of 24th Jun 2021.

 

Bank Name Saving Account Interest Rate
Jana Small Finance Bank 3.50% to 7.25%
ESAF Small Finance Bank 4.00% to 7.00%
AU Small Finance Bank 3.50% to 7.00%
Equitas Small Finance Bank 3.50% to 7.00%
Ujjivan Small Finance Bank 4.00% to 7.00%
Yes Bank 4.00% to 5.50%
South Indian Bank 2.35% to 4.50%
Kotak Bank 3.50% to 4.00%

Source: https://www.myloancare.in/savings-account/top-banks-with-highest-savings-account-interest-rate-online/

 

b) Cash in hand:

Though it is otherwise discouraged, along with emergency savings in a separate bank account, it is prudent for you to keep cash in hand in lieu of at least one-month expenses.

This is because some of the emergencies do not give time for you to go to your bank to withdraw the money or any other option.

Moreover, there can be other technical glitches like the following that can be best bypassed to a certain extent if you have some cash in hand.

    1. Failure of internet connection due to a severe storm or cyclone may not allow for digital payment/ transfer of cash
    2. System failure at the medical facility to not allow for online payments
    3. ATM machine does not work due to technical failure
    4. ATM can run out of cash at times
    5. Emergencies or hospitalisation in the middle of the night will also not allow you the scope to withdraw cash from the bank against a cheque.

Thus when considering where to invest in emergency, you must also regard keeping some cash at home.

 

c) Sweep-in Fixed Deposits:  

You can also look at siphoning off your emergency savings into a sweep-in FD if you do not want to open and maintain a separate account exclusively to invest in emergency fund. There are two benefits to this action of yours –

    1. Your money will earn better interest than lying in your savings account
    2. You still have 100% liquidity on the money as you can withdraw the money if and when required to mitigate financial emergencies by withdrawing the money with your bank debit card and/ or online transaction without delay on a bank working day or even on a bank holiday.

However, it is important to remember that only single holding accounts are entitled to have sweep-in FDs.

This is definitely a good security measure to protect the interest of the primary account holder.

 

d) Liquid mutual funds:

If your emergency corpus runs into a few lakhs of rupees, then you may also look at keeping a part of the fund in a liquid mutual fund of repute.

This is because, generally a liquid mutual fund gives more return compared to a fixed deposit, especially when the equity market is on the downturn.

However, as an investor, you must also know that liquidating the money from a liquid fund can take up to one to three working days.

A certain mutual fund allows for ATM card facility to allow the investor to pull out up to INR 50,000 a day from a scheme, Example Nippon India Mutual Fund has their ‘Nippon India Any Time Money Card.’

 

Caveat:

While a fixed deposit has a deposit insurance cover of INR 5,00,000 on it, there isn’t any such protection available on any liquid mutual fund investments.

Thus as an investor, it will be completely your call on choosing to invest in the various tools depending on your risk appetite and decide how to manage the emergency fund on your part.

 

Benefits of having an emergency fund

There are several unsung benefits of an emergency fund as listed below.

 

a) It gives peace of mind:

Financial stress can be detrimental to health and life as the inability to provide for basic yet serious financial needs in the face of an emergency situation can be very depressing and disrespectful for the bread earner of the family.

It has been seen to create panic in people leading to loss of sense of balance and calm too.

The existence of an emergency fund gives peace of mind and psychological power to concentrate on other areas of life as you know you know you are protected against unforeseen expenses in case they arise.

 

b) No need for revolving credit and/ costly loans:

If you have your emergency funds in place to fall back on in the face of the short-term or long-term financial crisis, you know you will not need to swipe your credit card or take any loans to tide over the financial crisis in life.

This is because repayment of loans and interest on credit cards only adds to your mounting financial owes instead of lessening them.

 

c) It protects your long term financial goals

This is because, in case of any financial emergency, you know your emergency savings will take care of your emerging financial needs.

You will not need to break any investments planned for your future dreams and aspirations.

 

d) Makes you a disciplined investor

When you get into the habit of saving money in your emergency fund; you see the results in term of building a corpus for a defined purpose on one hand and the tangible and intangible returns associated with it on the other.

This is bound to give you a sense of joy and accomplishment that will urge you to invest in bigger financial goals in life through disciplined investments.

So what are you waiting for? Download the Koppr app and start your financial planning today!