Priority 5: Emergency fund - Sumit Khedkar

Priority 5: Emergency fund

Nobody knows what is going to happen tomorrow. It is better to be ready with a contingency plan. I am 30 year old and if you are of my age then you would have encountered at least two recessions by this time. Of course, recession will not be there forever but what if, you lose your job tomorrow. How will you pay your next month’s EMIs? How will you manage your day to day expenses?

One should have an emergency fund using which he can survive for at least 4-6 months. Your emergency fund should be six times your monthly obligations and monthly expenses. If you need one lakh rupees per month to pay your EMIs and manage your household then you should maintain an emergency fund of four to six lakh rupees.

 

The best way to maintain an emergency fund is investing in bank fix deposits. Bank FDs give you 9 to 10% returns and FD is a liquid asset as well. If you are in need of money then you can liquidate your FDs at any time.

Creating emergency fund using bank fix deposits is a onetime solution. Once you have built the required emergency fund you will not have to bother forever in your life.  The fund value will grow with the time and you will remain protected forever.

Following table will help you understanding the concept.

Your Age	Emergency Fund	Invested In	Maturity Amount
30	6,00,000 Rs (one time investment)	Bank FD 9% returns	9,23,174 Rs
35	Reinvest Maturity 9,23,174 Rs	Bank FD 9% returns	14,20,417 Rs
40	Reinvest Maturity 14,20,417 Rs	Bank FD 9% returns	33,62,643 Rs
50	Reinvest Maturity 33,62,643 Rs	Bank FD 9% returns	79,60,598 Rs
60	Total 79,60,598 Rs		Total 79,60,598 Rs

 

 

At the age of 60, value of your emergency fund will be around 80 Lakhs!!!.  You can go for a world tour with this money if you will not use it in your life time.

 

You need a short term emergency fund also, to support sudden unexpected expenses. Like, in case of hospitalization most of the hospitals ask you for a deposit of 15-25K Rs. If your car is broken then you need at least 10-15 K to fix it. Hence, it is a better idea to have short term emergency fund ready. In today’s value you need at least 20-30K in your short term emergency fund. You should put your short term emergency fund in a separate savings account, not in your salary account. Maintaining emergency fund in a separate account ensures that the fund remains untouched and it is always available to you.