 "In charts: It takes 15 months to build an emergency fund 3X your income")
Despite the pandemic, three out of 4 Indians don't have savings set aside for sudden expenses.
According to a survey titled "India's Money Habits" by personal finance platform Finology, 75% of Indians do not have emergency funds and could default on their equated monthly instalments (EMIs) in the event of a sudden layoff.
Now, an emergency fund, is one of the most basic forms of saving. Your emergency fund should ideally be three to six times of your monthly income and can help you tide over sudden emergencies like a job loss or a medical emergency.
Bankbazaar has calculated the time it may take to create an emergency fund for individuals with varying incomes.
In the above table, if you want to build an emergency fund three times your current monthly income, it will take you a total of 15 months. If you want to build an emergency fund six times your current monthly income, it will take you 28 months, revealed the study. And if you desire an emergency fund, nine times your income, it will take 41 months.
Before you start investing, it is essential to cover the basics, i.e., emergency fund, term life insurance, and health insurance.
Many factors, such as age, health conditions, nature of jobs, and the number of dependents, influence these decisions.
FDs or liquid funds?
Before you start investing, it is essential to cover the basics, i.e., emergency fund, term life insurance, and health insurance.
Many factors, such as age, health conditions, nature of jobs, and the number of dependents, influence these decisions.
FDs or liquid funds?
In order to build your emergency fund, you must first evaluate your monthly mandatory expenses like household expenses, children’s education fees, equated monthly instalments (EMIs), and insurance premium payments. Of your mandatory expenses, a few can be kept in fixed deposits or liquid funds.
" For an emergency fund, one must park 12 months of expenses in a bank fixed deposit or savings account with a sweep-in facility. " said Ajinkya Kulkarni, Co-Founder and CEO, Wint Wealth.
A sweep-in facility ensures that whenever funds in your Savings Account are running low for a purchase or transaction, the bank will transfer the deficit amount from your Fixed Deposit to your Savings Account without affecting your interest rate in your Fixed Deposit.
You can also choose a liquid fund
Liquid mutual funds invest in high-quality government and corporate bonds maturing within 91 days. These funds provide marginally better returns than fixed deposits and are suitable for those looking to park a lumpsum amount for a short tenure safely, say, to make a down payment for a flat three months later.
" For example, if you have received an annual bonus worth Rs 10 lakh from your employer, and you had already planned to buy a house, you can park it in a liquid mutual fund while your paperwork for the down payment is finalized. However, withdrawal from a liquid mutual fund takes 1-2 working days," explained Kulkarni.
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"A well-performing liquid fund should beat its benchmark as well as its peer funds, but investors must also verify that the fund has done well consistently. This can be checked by looking at its past returns. You can go for a direct fund with a low expense ratio. The returns between the two options are not likely to be too different. But the difference is forward returns versus past returns. The FD guarantees a forward return whereas the liquid fund can only advertise its past returns and cannot confirm a fixed rate of future return," said Adhil Shetty, CEO of Bankbazaar.