dictates that one should probably have about 6 months of expenses saved up in
the event of an income loss. If you are self-employed/work in an industry where
finding a job is harder then you should probably have more saved up.
Where to park your
As the name
suggests, this is to tide over an emergency. It should be in extremely low-risk
investments that will nearly guarantee your principal. FDs in Govt banks, Govt
treasury bonds, Savings account are options you could evaluate. Do not get
tempted by a higher return FD vs a lower return FD. Evaluate where there are
almost zero risks to your principal and park your emergency fund there.
You would need the
money fast and you shouldn't have to do distress sale to get that money.
Evaluate options where you can quickly get the money into your bank account.
Ask the bank manager or wherever you are parking your money as to how soon
would this be credited. Some liquid funds may take up to 7-10 days for the
amount to get credited.
Credit card is NOT
an emergency fund
I have heard advice
floating around that you can use your credit card as an emergency fund, please
don't treat the credit limit on your card as an emergency fund. The annualized
interest rate is about 30%-40%. In the off chance you have to default and pay
the credit card bill over a couple of months, your credit score will take a
beating. This might affect your chances at getting a home loan or may hamper
your chances at getting a better interest rate for your home loan
protects your other investments
Think of this as
insurance for your other investments. You can avoid distress sales to cover for
the emergency. This would mean you can keep your other investments intact and
growing well as they should.
How to replenish
your emergency fund
When you can think
clearly/calmly about the situation you are facing, decide how much money do you
need to cover this expense. Pause your other investments like retirement
planning etc temporarily to replenish your emergency fund. Once replenished you
can resume your other investments. Don't worry about not investing for these
few months. Life has thrown you a curveball, it takes time to pick yourself up
and back on track.
What are your views
on the topic? Drop-in your comments below