Life is full of uncertainties. Everyone goes through good and bad times in his/her life. While good times are relished by everyone , its the bad times that people really dread about. So when we think about the subject of financial planning whose basic aim is to plan for financial security, we can not help but plan for all those bad times that might present themselves in our lives.
How do we do that? The answer to that is first to acknowledge the need for planning for a rainy day as they say.
What exactly is an "emergency fund"?
Emergency fund is the fund kept aside to be used only during an emergency. They are not supposed to be used to meet your daily expenses.Examples of emergency are need to plan for possible job loss, medical emergencies, temporary loss of pay due to temporary physical disability etc. These situation might put great amount of stress on ones finances, if not planned properly. The best way of planning for any such eventuality is to create a basic emergency fund. This emergency fund will help you meet both your expected and unexpected expenses for atleast 6-8 month s time period.
So how much should we save for this emergency fund ?
Generally it depends on your life style , your liabilities and your own sense of job security etc, but, I do think one should at least have at least that much money in his emergency fund to last him and his family at least 6-8 months. Now you work your expenses , both fixed and discretionary for 6-8 months and you know how much to save.
Where should I keep this money?
Since its supposed to be fund to be used during emergency, it needs to be put in an instrument which is liquid enough. for example, you can have it in FDs in banks or invest it in liquid funds etc. But, I would recommend FDs since they provide excellent liquidity and are quite safe as well. Mind you, getting returns from our emergency fund is not our main objective. We need to keep it where there is no chance of loss of capital/principal.
When should I save for fund, before my other investment or after?
You should look to build emergency fund as the first step in financial planning. We need to create a safety net for ourselves before we start investing for wealth creation, retirement planning etc.
Why its more relevant for Indians?
Unlike , developed countries like USA etc we in India don't have any social security and as such we are pretty much left on our own during any emergency/job loss etc. We don't have insurance policies to protect oneself from the financial impact from job losses , unlike in some other developed nations. Hence , its almost an absolute necessity to have an emergency fund for all of us in India.
Stay wise n Stay wealthy..