An emergency fund covering three to six months of essential expenses can help individuals manage unexpected costs, such as medical emergencies or job loss, without taking on additional debt. For someone spending Rs 30,000 a month, this would mean setting aside Rs 90,000 to Rs 1.8 lakh.
Ways To Keep An Emergency Fund
- Savings account: It lets you access money when needed and is a suitable place to keep funds for immediate emergencies.
- Fixed deposits: Consider keeping a portion of your emergency fund in a fixed deposit. Check premature withdrawal rules, penalties and access timelines before investing.
- Liquid mutual funds: These invest in short-term debt and money-market instruments. However, they carry investment risks and redemption may take time. They are not guaranteed deposits and may not be suitable for money you need immediately.
Avoid investing emergency money in volatile assets such as stocks or equity mutual funds. Market fluctuations could reduce their value just when you need the money.
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You do not need to save the entire amount at once. Start by setting aside a fixed amount every month. If you are a beginner, aim to build a fund covering one month of essential expenses first, then gradually work towards the three-to-six-month target.
Keeping this money separate from your regular spending account and review the amount whenever your income or expenses change.
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An emergency fund lays the foundation for your investment journey. By building this financial cushion first, you can prepare for unexpected expenses and approach long-term investing with greater confidence.
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