What are emergency funds and why should everyone have one?

Emergency funds, as the name suggests is your safety net against financial disruption. This disruption could be as a result of a medical emergency or illness, job loss, or any untoward accident which results in loss of regular income.

Why are emergency funds the first goal of a good financial plan? The idea of creating a financial plan for oneself stems from the fact that we don’t want to be financially dependent on anyone. Not even on friends and family as long as possible. Money matters as we know can strain relationships. The Covid-19 outbreak is an alarming reminder of the uncertainty of life, jobs, earnings no matter how well placed one might be.

In times like these, we need to be sure of having liquidity and cash available for any unforeseen need. It is also a great reminder that the entire world, our friends, family, colleagues are all in the same boat. So getting financial aid if required may be the most difficult at this time. So how much does one accumulate to build an emergency fund? And where does one keep such funds? We recommend every individual or a family to keep aside at least 6 months equivalent of their monthly expenses in liquid and easily accessible investment avenues.

• By expenses, we mean your fixed monthly expenses, like bills, EMIs, rent, household expenses and other family related expenses like school fee, medical expenses etc.
  
• Keep in mind, while creating an emergency. fund, the two key objectives should be= Accessibility (ease of availing funds) and principal protection. Some of the avenues to create an emergency fund would include recurring deposits, liquid funds and other ultra-short term mutual funds which let you redeem funds instantly.
  

While you build your investment portfolio based on your financial goals, an emergency fund should be among your first investment goals. One should begin building an emergency fund, as soon as they start earning. So what have we learnt today? If you are yet to begin your investment journey, and still wondering where to begin, we recommend, you start building an emergency fund first before you begin planning your investment journey. Ask LXME for more help…