With increasing options available for investment, people always get confused while choosing the right one. You have to (and should) analyze all the options carefully, it’s your money and a lifetime of income that’s at stake.
Different investment companies offer lucrative benefits to gain the attention and money of the common man. And many of them also get trapped in the same, looking at low-interest rates or high returns and other perks offered to them.
You should save at least 3 to 6 months’ worth of your necessary expenses by funding your emergency savings account regularly.
Consider this as a mandate bill or investment for a secure future.
Try to keep it in sources that will pay you good interest along with preserving your liquidity.
To be prepared for the future, be sure to keep your health and disability secured.
But as mentioned earlier, it’s your lifetime income that is at stake, and so, you should analyze all the alternatives cautiously. A government recognized, legal source of investment is what you should preach. Herein, the only ‘safe’ and ‘beneficial’ option that exists today for investors is Mutual Funds.
Whether you’re a seasoned investor or it’s your first time, risk in the legality and credibility of the investment mode shouldn’t be compromised. Moreover, mutual funds are one of the most trustworthy and credible investment sources of today.
Additionally, besides considering it for short term and long term investment only, another profitable feature of this is creating an Emergency Fund.
What is an Emergency Fund?
It’s the collection of money that you create for unplanned expenditure or circumstances. Life is unpredictable, and any person of whatsoever field might need a high sum of money in the future. This will be built gradually with your EMIs and is not a subject of overtime investment.
Your investment of today will reap you good results tomorrow. It’s as easy as that.
Investing in a source where there’s a probable restriction on withdrawal won’t help you in these unexpected situations. Herein, many sources fail to give this ‘liquidity’ element in your “investment fund.” Even if some sources might allow you to withdraw your money before the stipulated time, they charge penalty fees for the same.
Remember, the amount invested by you over time should deliver you guaranteed and good returns, and not go down in any case.
How Much Should You Invest in Your Emergency Fund?
The size of your emergency fund would purely depend on your income and ability to save and invest money out of the same into your emergency fund.
However, experts suggest that setting aside at least 3 to 6 months’ worth of your living expenses should be taken into consideration.
For example, If you’re single and independent but have your family’s support financially, you can easily save for 3 months. However, if you’re married or have a family to take a look after, you’ll probably be comfortable with 6 months or even more.
Besides this, there are some other things as well to consider the amount you might need to save/invest for un-called situations.
Let’s say, guarding yourself, or your family members from a possible job loss or of income are usually the foremost reason to save for sudden unexpected circumstances.
But your situation may not guarantee to save as much as 6 months’ of your basic expenses would. If you could easily substitute your job, saving 3 months’ worth may be accurate. If the contrary is true and it could be a long hunt to find a new job, saving up to 6 months’ worth or beyond would be better.
Kinds of Emergency Funds
After you’ve decided on the above factors, it’s time for you to find a worthy source to create your emergency fund. Please note, you should separate your emergency fund from your usual spending money and other types of savings.
This could imply different options for investment. However, make sure they are convenient and have easily accessible options as well as offers decent returns on your investment.
There are primarily two kinds of emergency funds that you can save for:
Long-term emergency fund: This is when you have to save for emergencies like a significant natural disaster or an unforeseen medical emergency. This choice allows you to gain a slightly bigger rate of interest but may take comparatively more time to withdraw.
Short-term emergency fund: This is the fund you would need in cases of sudden emergencies. This investment mode will offer less in terms of interest but will allow you to withdraw your money immediately. Thus, giving you easy accessibility required in cases of extreme situations, which can’t wait till you gain access to money afterward as you’ll get in your long-term emergency funds.
Things to Consider Before Creating Your Emergency Fund
It’s not at all an advisable option to save money for the future in the form of cash. Let’s face it- the temptation to use the cash will be strong, and the cash will likely be spent quickly. You should pick an option that is not as liquid as cash but has flexibility on its withdrawal as well.
Investing emergency funds in a source like fixed deposits will compromise on your returns (if broken prematurely). Also, it would be tax-inefficient if and when the requirement does not arise till three years. This is due to the reason that long term capital gains on debt mutual funds (taxable at 20% after indexation) benefits do not apply to fixed deposits.
It’s always advisable to invest it in a platform where you can get good returns from it without compromising on the liquidity aspect. The right thing to do would be to spread your emergency fund in different liquid funds options like short-term RDs or debt mutual funds.
Herein, Mutual Funds is what I suggest, and here’s why:
Why Mutual Funds for Building Your Emergency Fund?
All the criteria as mentioned above are completely fulfilled with only one source of investment, and that’s mutual funds.
Mutual funds invest your provided money in debt instruments of less than 91 days maturity. These debt instruments are high-quality papers in nature and won’t get affected by interest rates. Moreover, this is why they are capable of earning decent returns without being unpredictable.
Something that is not fulfilled in saving of fixed deposit accounts. You might think of keeping cash for your emergency, but that won’t give you any extra returns on your saving.
The interest return ranges from 6.57% to 8.14%. These are certainly higher returns than what you would get from other sources like a savings account or fixed deposits.
In fact, in the future, if you don’t need this emergency fund, then you can keep your investment in this liquid fund for more than 3 years, and you’ll benefit from the investment when you redeem that later.
The bottom line is, there are many possible situations besides losing a job that could ask for immediate financial requirement, like natural disasters, unexpected childcare expenses, or a sudden medical emergency that your insurance won’t cover.
The primary aim of a financial plan is to be prepared for any future negative surprise/shock coming your way. The plan of creating an emergency fund works towards minimizing your stress on the money. Emergency funds, in fact, help us in these two different ways. The other one is, you’ll feel more satisfactory and comfortable in facing the unknown situation ahead as you’ll be prepared for the worst.
Well, you might not be able to plan for all suddenly, but you can start now. Protecting yourself with insurance, having enough cash savings that can be easily obtained, and keeping credit available will help a great deal for starters.