This month, we have all focused on the basics of emergency funds. So let’s end the month on the same note. So here are five rules of emergency fund that you should know!
Work Towards a Goal
To create an emergency fund, you need to work towards a goal. And that goal is to create and have enough savings to accumulate an emergency fund gradually over time. While this seems to be a lot easier to say, implementing it practically is equally challenging. This is because one needs to take short-term pain and make ends meet within the available finances to create an emergency corpus over the long run. So the initial rule is to realise the importance of an emergency fund and work towards it!
Know the Benchmark
When creating an emergency fund, the most practical and difficult question is how much one should accumulate in an emergency fund. While the amount will differ for everyone as no size fits all, a simple rule of thumb is to keep anything between six to twelve months of expenses as an emergency fund corpus.
If the amount is less than this benchmark, you should work towards fulfilling this gap, and if you have more than the required corpus, it just acts as an extra layer of security!
Investment Avenues Should be Liquid
Emergency funds are created to act as a rescue during times of financial distress in one’s life. They should be readily available to serve as a rescue during those times. As a result, emergency funds should be parked in liquid investment avenues. You should be able to quickly redeem your investments at a fair market price. In that sense, parking your emergency fund in a direct real estate investment does not make sense. Hence, liquidity becomes a vital factor.
Take Care of the Interest Rate
Keeping your emergency corpus in hard cash will earn no return, and the purchasing power of your money will decrease over time due to inflation. You might think the amount set aside as emergency corpus will be sufficient for you in difficult times. Still, after adjusting it for inflation, the amount might fall short of fulfilling your needs.
Remember the Sole Purpose
It is important to remember the sole purpose of your emergency fund. It is only to protect you on your difficult days. Hence, using it for other purposes is not desirable. Consuming your emergency fund to meet the shortfall in your daily expenses or deploying those funds in stock markets during market downturns will destroy the purpose of creating an emergency fund!
These are the five must-know rules to create an emergency fund and plan for the future. All five should complement each other and not be seen in isolation.