'Emergency Fund' is that fund which is used to set aside funds to be used for any emergency like loss of job, illness or a major expense. Here are some tips for having an emergency fund:
- Everybody should have allocated emergency fund though some do not need to put away the requisite amount if they enough assets. One should never come to the conclusion that credit card will support in case of emergency. It should be kept in mind that the cushion that plastic money provides lasts only 15-30 days, till the bill arrives.
- There was a time when gold was seen as the safe investment for tiding bad times. Instead, the emergency fund should be stashed in a liquid option, such as a sweep-in bank account or an short-term debt fund.
- Investing the emergency fund in a good equity-based option for better returns will be ideal.
- Emergency fund should be large enough to take care of your living and other essential expenses, such as house rent, school fees, health care and insurance, for 3-4 months. At the same time, do not allocate too much money to it.
- Do not try to build the corpus too quickly. It will be a burden on your cash flow and derail other plans, such as saving for retirement or child's education. If you have not already established in emergency fund, start putting away 10-15% of your monthly income for this purpose. This will help you build a corpus in about 2 years. Income tax refund or annual bonus should also be diverted to it.