We live in an uncertain world, and financial emergencies could come to you at the least expected moment, whether a crisis due to the COVID-19 pandemic or a sudden job loss. Without an emergency fund, things could go from bad to worse in a spiral. As emergencies can disrupt your monthly budget, a designated corpus for emergencies could be the way to deal with financial uncertainties and help you tide away the situation.

Many factors will determine the size of your emergency corpus, such as lifestyle, living expenses, etc. Your emergency fund can be bigger or last longer if you can avoid unnecessary costs.

Your living expenses could include rent, groceries, medical bills, etc., which may vary from one person to another. So, the key is to keep saving a small amount regularly and avoid unnecessary expenses to fund your emergency corpus well.

Key factors to consider before building an emergency fund:

Liquidity: Liquidity is crucial for an emergency fund, considering the risks and lock-in period. For instance, stocks and real estate investments may be unsuitable for an emergency fund.

Health: Medical emergencies can drain your resources significantly. Consider your health condition before planning for an emergency corpus. If you live with parents and kids, you might want to include them in the plan to cover them financially in a medical emergency.

Past Emergencies: Your past experiences can give you a good idea of the fund’s size or liquidity you will need.

Also Read: Why Is A Will Important In Estate Planning And How To Create One?

Investment instruments for building an emergency fund:

Savings Account: Out of sight is out of mind. By keeping the money separately, you will be less tempted to use it. You can maintain an emergency fund in a separate savings bank account for emergencies. It can be quickly withdrawn when you need it. Hence, it is the best way to save.

Debt Mutual Funds: Liquid funds, ultra short-term funds, money-market instruments, etc., are the best investment tools to build an emergency corpus. They are redeemable up to 90 per cent within a day during emergencies. Debt mutual funds are relatively predictable and low-risk as they invest in government and corporate bonds.

Fixed Deposits: Fixed deposits can be useful instruments to build an emergency fund. People use the interest income from FDs to pay for college tuition fees, discretionary items, travel, etc. FDs provide easy liquidity and an income avenue with attractive rates. You can make several fixed deposits systematically for emergencies.

An emergency fund is essential regardless of your age and financial background. However, each individual might have different needs and considerations for an emergency fund. Medical emergencies may be a more important consideration for seniors for having such a fund. For the rest, it could simply be a safety net against job loss or a career change.