What is emergency fund for family?
This fund makes salaried people confident in facing bad bosses, if you have this you don’t need to compromise self respect in your present job and take tough decisions. At the same time it is essential for self employed and businessmen too. Today almost everyone is living in materialistic world no one has time for others. We have left joint family system and chose to live in nuclear family to focus on our own family members and dear ones. In this era everyone is working hard in profession to fulfill his/ her dreams, this professional period is approx 20 to 35 years long and any unfortunate event like medical emergency in family, accident, sudden job loss, any kind of emergency in relation can burn the pockets and many time it disturbs the whole family and career too. In professional world we need to run continuously and to safe guard ourselves from unexpected happenings we need to have some funds as buffer or safety cushion to bank upon in case of emergencies so that we pass the period without disturbing our future. This is the most important part of Financial Planning to prepare the base of your financial well being.
This should be our own fund which is as liquid as cash, in case of emergencies many people feel that they can borrow funds from their known people and market but only our own funds are reliable source in this situation. Your best friend may also face some emergency situation at the same time, in that case only your funds are available for you. The main objective of emergency fund is to provide you funds in case of extreme emergencies only, this fund should not be invested for better returns or one should not lend it to any person for personal reasons also. This contingency kitty should be invested in a way it is available at any point of time to the family. This kitty can’t be used for impulsive buying or down payment of your first car or home.
Why to create emergency fund?
When you are busy in your routine life if you don’t have contingency fund and some unfortunate event takes place, it can negatively impact financial health of the family and it may take years for you to recover. Although people face emergencies 3-5 times in their whole life, if you are prepared with emergency cushion in saving bank account or liquid investments you may smoothly sail through this without affecting your future plans. We work for our family and it’s our number one priority to take care of our near and dear ones leaving everything aside. So we need to be prepared emergencies with our own funds only to protect our career also. Today many people are working for private sector with notice period of 2 – 3 months only and the job market is so competitive that it may take 2 – 5 months or more in getting new job. Having funds allows you to control your life and it allows you to have trained nurse or other helps, it allows you to provide things for your family and you may concentrate on your career. For the families working in private sector it is must to have emergency fund for expenses of at least 6 months and more.
How much emergency fund do I need?
Everyone needs emergency fund for a certain period, it may vary from family to family depending on its monthly expenses and responsibilities. It also depends on the nature of inflow of funds from the occupation, like most of the doctors are self employed and income is dependent on their daily practice or surgery only, a salaried person gets his monthly salary, a businessman may have billing period of 1 year or more. It also depends on number of earning members in family, families with more than one earning members require less amount of funds per earning member for emergency needs. While calculating emergency requirement one should look for the elder members and dependants, your parents can be your source of emergency fund or they me be dependent on you, consider all the expenses of family like grocery, house hold, kid’s education, travelling, Loan emi, regular investments, medical requirements, other and the monthly expenditure should be calculated by calculating annual expenses of the family and by dividing it by 12. All the expenses of family should be considered. Families with medical history should plan accordingly. Families should plan for amount that is equal to the expenses for at least 6 to 12 months for whole family without income. Self employed people and the salaried people working in higher positions should consider higher amounts for emergency.
How to create emergency or contingency fund for liquidity?
There can be mainly two types of situations, one absence of emergency kitty or Savings, other situation in which family has Investments in non liquid assets. Families in first situation should decide to create emergency Kitty in two ways by keeping the funds aside if they have savings or alternatively they can start saving every month for this objective, they should create this fund gradually with highest priority. In Second situation family should start to invest the savings in liquid assets or they can liquidate some assets, so that it is available for family at the time of actual need. To create and maintain emergency fund separately family needs to be committed at all times, and they should guide their kids and new earning members for the importance of this kitty. It has been observed that wealthy people keep more than 30% of their wealth in liquid assets. For this purpose you can use different online financial planning solutions also, which give you real time reports for your needs
Where to invest emergency fund?
The funds for this purpose can be invested in the assets which can be liquidated immediately. Which means the returns on the emergency fund will be low and the main objective is availability of funds when ever you require. Instruments for investment can be Savings Bank Account, Fixed Deposits, Liquid Mutual Funds, Liquid Plus categories of mutual fund and some funds can be parked in Bond funds of mutual funds which have the investment style of buy and hold and believe in accrual strategy. While investing this fund you can distribute the funds in these of other investment instruments based on the liquidity, although the prime objective is availability of time but you can get some extra returns by investing in right investment options. If you find the distribution to be complex, you may consider keeping all the funds in saving account, interest amount of up to Rs. 10000 from savings account is free from Income Tax in the hands of individuals. Once must also consider the operational procedures and time gap in payment while making the investment decision.
In total Emergency Fund is essential for every family, it should be maintained through out the life at different stages of life. One should periodically review the requirement of contingency kitty and make the changes in investments accordingly. This should be the first priority before starting investments for growth, this gives you cushion for bad times in life. One can plan emergency fund on the Life Planner section of Planyourworld, there one can also do financial planning on DO IT YOURSELF mode.