A financial plan is a road-map to achieve your life’s financial goals. These goals can be your retirement goal, Kid’s education goal, vacation planning, purchase of house etc., All of us do try to save and invest in one way or the other for these planned goals.
Life is full of If’s and But’s. Not everything always goes the way we planned. There can be some unpleasant surprises. Whether we like it or not, uncertain moments/events always come announced in our lives.
“Life is not a straight line leading from one blessing to the next and then finally to heaven” – John Piper.
Emergencies can be ; you may require funds to get your car repaired, a medical emergency, house repair, loss of job etc.,
Are you prepared to face these kind of unforeseen contingencies? Do you have an emergency fund? Do you have a contingency plan?
Having a plan for unplanned things is also a very important part of your financial planning. Infact, it forms part of the most important block of your Financial Planning Pyramid!
Investing for your financial life goals may make you/your family wealthy, but saving for an emergency fund may ensure you that you do not become poor. It may ensure you that you do not pull out money which has been accumulated for your other financial goals.
This is a very tough question to answer.
To put it in a simple way, I believe that maintaining a small Emergency Fund is better than having ‘NO FUND’ at all.
The quantum of your contingency fund can be dependent on many factors like ; how stable is your income, type of occupation, your (family) life style, Medical history of self/family, number of dependents on you etc.,
Your EF kitty should be big if you are self-employed or if you have a very irregular flow of income. Also, if you are planning to become an entrepreneur, then you should have sufficient EF.
As a rule of thumb, you may maintain EF in the range of 3 to 12 times of your monthly living expenses. You may even include annual recurring expenses like Kid’s education expenses (annual), EMIs, insurance premium amounts, medical expenses etc., while arriving at your monthly expenses figure.
So, Emergency Fund = Save for unplanned events + Save for some recurring (short-term, planned/unplanned) events in life.
Your choice of saving avenues for EF should be based on two factors ;
Saving for unplanned events : Highly advisable not to take any risk and save in those options where you can withdraw the fund instantly or within 1-2 days. You may consider building an emergency fund of at least 3 to 6 months of your monthly expenses (basic needs).
Examples : Cash in Bank, Bank FDs, Bank RDs, Sweep-in accounts (Do not chase for returns, it is not your priority).
Saving for certain Planned / Unplanned and/or Recurring or Non-recurring events as part of EF : Besides above options, you may also consider some options like Liquid Debt funds, Arbitrage Funds, Ultra Short term debt funds etc., (You may look out for these options which are liquid, tax efficient and can give you slightly better returns by taking a bit of risk.)
We maintain two Emergency Funds. We do not take any risk with one kitty (we call it as ‘rainy day fund’) and maintain around 6 months of our living expenses in Savings account and FDs. We also maintain a second fund, where we save around 6 – 9 months of our living expenses in FDs, Liquid fund & in one Arbitrage Fund (these are in my spouse’s name).
When we believe that the second fund is growing bigger than we intended, we move this money to other medium or long term goals. Also, in the past, it so happened that we withdrew money from second EF kitty and invested in equity mutual funds (when markets have fallen and had to pump in more money into equity funds). However, we have replenished it again. We make sure that we do not touch the first EF kitty for recurring or planned events.
Below is one of the blog reader’s saving plan for his Emergency Fund (mine is very similar to his plan).
Never put your emergency money in a life insurance plan, a corporate fixed deposit, or in any equity mutual fund. Choose products that are highly liquid, safe / less risky and have low premature withdrawal penalties.
In case, you do not have any Emergency fund, it ‘s high time you have one. You may postpone your investments but do not postpone saving for your Emergency fund.
Income – Savings for Emergency fund = Disposable Income – Investments – Expenses = Surplus Income (if any)
“If It Is Important To You, You Will Find A Way. If Not, Will Find An Excuse.” – Ryan Blair
(Image courtesy of Stuart Miles at FreeDigitalPhotos.net) (Post published on : 18-July-2017)
This post was last modified on July 11, 2023 6:50 pm
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Truly an eye-opener article,
Most of the people are ignorant about the details and later have to repent. Am glad you helped in some way
Hi Sree
I have a RD that is maturing next month.The maturity amount is aroung 240000.
I'm planning to invest around 40000 to my emergency fund.
The remaining 2 Lakhs i want to invest in some short term investment options with period from 3 to 12 months.
Since bank FD's are offering very low interest nowadays i want to check other options available.
I'm looking for a low risk less volatile investment options.
Also suggest better investment options for parking my emergency fund as this is the first time i'm building this fund.
Dear Vishnu,
You may consider options like Liquid debt funds and a small portion in an Arbitrage fund (gains under arbitrage funds are tax free if the units are held for more than 12 months).
Kindly read :
Debt funds types
Best Debt funds
Best Arbitrage Mutual Funds
Hi Sree
I was comparing the interest offered by some Bank FD's , Liquid funds and some arbitrage funds.
Below is my analysis
Some banks like RBL offers around 7.20 for 1 year FD.
While the highest returns offered by best some best liquid funds are around 7 only. (According to last 1 year data)
I could see arbitrage funds also offering interest rates less than 7 only.
In this current scenario should i opt for Bank FD's offered by RBL,KTDFC etc over liquid/arbitrage funds.
Dear Vishnu,
Have done your analysis on Taxation view point?
If you are planing this for your Emergency fund, kindly give more importance to Liquidity and safety and give second priority to RETURNs.
Thanks Sree..
Can you suggest some liquid debt and arbitrage fund that looks good this year.
I wanted to invest money worth 200000/-.
What is the best and easy option?
Dear habeeb,
May I know your investment objective and time-frame?
Easy - in the sense??
Nice article
Hi Sir,
Below is the current status of our family portfolio. We are paying huge taxes because of FD. Can you please suggest to re-strategize this allocation. Note: I recently started SIP in ICICI prudential val.fund.
S.No Person Age Source of Income Amount Per Month Fixed Deposit Recurring Deposit MF PPF
1 Father 61 Pension 32500 700000 0 0 0
2 Mother 60 Pension 32500 6200000 0 0 0
3 Myself 29 Salary 55000 3400000 160000 6000 300000
Total 120000 10300000 160000 6000 300000
Dear Deepak,
You may kindly first set financial goals and then link financial products to them.
Any specific objective for investing in FDs/RDs..
Kindly read :
How to create a solid investment plan?
List of best investment options
List of tax exemptions
Thanks for your post it was very helpful. I understand that if I sell an agric land in rural area then that's exempted from income tax. eg: If I sell a piece of land and get say about 8-10 lakhs then does it mean that. this amount of Rs 10 lakhs is tax exempted? I am using this to clear some loan.
Dear Lalitha,
If your agricultural land is in rural area, such land is not treated as Capital asset and hence no capital gain taxes are levied. Agricultural land in Rural Area India is not considered a capital asset. Therefore any gains from its sale are not taxable under the head Capital Gains.
Kindly read : Sale of Agricultural land & Tax implications.
Dear Sreekanth,
very nicely covered article and also very well explained regarding Emergency funds. Do you advice keeping standalone emergency fund for health expenses, in some liquid funds? this is mainly because of falling interest rate scenarios in current bank FDs.
regards
RAJ
Dear Raj,
If there is such a requirement, you may build EF for health expenses too, but not because of the reason that the current interest rates are low.
Hope you get my viewpoint!
dear Sreekanth Reddy ji, my take is the point regarding credit card, i have yet to implement it, thanks for the share.
Very good article
This is one of the best articles, I have read on this site. I was looking for a way to plan my EF. I will narrow down my total expenses and will start investing it accordingly. Thanks for the wonderful post Sreekanth :)
Glad you find my post useful. Keep visiting ReLakhs!
Thank you!