How Much Should Be Your Emergency Fund Amount?

Emergency Fund

In last week’s edition, we discussed the different avenues where investors can park their emergency funds. Today, let’s discuss the factors that can help decide how much amount is enough for your emergency corpus to help you sail smoothly during difficult times!

Number of Dependents

The amount of emergency corpus you should keep aside for difficult times is directly related to the number of family members dependent on you for their daily expenses. The emergency corpus size needs to be considerably increased if there are many dependents. This is important as, in the case of any job/business income loss, many people will have difficulties meeting their daily needs.

Salary Versus Expenses

If a higher proportion of your salary or income goes towards meeting your consumption expenditure, creating a vast emergency corpus becomes immensely important as you will have minimal savings in that case. Also, the focus should be on reducing unnecessary expenses and increasing savings gradually over time.

Health Condition of Family Members

Family members’ health condition also affects the emergency corpus’s quantum. If there are more aged people in a family, medical bills will soon start piling up, and as a result, an increased buffer amount needs to be set up to meet the expenses in case there is any shortfall in savings. It is also important to note the healthcare inflation in a country like ours, which increases the significance of maintaining an emergency corpus.

Inflation

Living in a country where inflation is in high single digits or double digits will silently eat into the purchasing power of your savings. You might think you have enough money in the emergency corpus, but years down the line, the value of that corpus will decrease silently, leaving you with a shortfall.

Job/Income Security

Suppose you are working in a cyclical industry or an industry which consumers see as discretionary. In that case, your income might be unstable, or the risk of job loss/business failure can be high. The situation is further worsened if you are the family’s sole earning member; hence, if you are working in an industry/sector prone to cyclicality, the importance of maintaining a sufficient emergency corpus increases.

These are some of the factors that can help you the right amount of emergency corpus needed. It is important to note that no two individuals can have the same amount of emergency corpus due to their unique personal and financial circumstances. Still, as a thumb rule, one can keep six to twelve months’ worth of income in an emergency corpus!

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