Every individual who is making some financial planning should also be thinking about having emergency funds. In countries like India which is a developing nation, having an emergency fund is mandatory because there will always be expenses that government cannot support. At least there are a few countries where government supports free education and free medicine. India is still developing to reach that state.
Many people today understand the importance of emergency funds and also think about the same. But most people are not sure how much should be their emergency fund. We have to be sure that we don't have too much saved or locked up emergency funds too. That will take away the opportunity to earn further by investing that money in something with bigger returns.
6 months living expenses
I have had chats with many friends and senior members on this topic. Most of the time we share the same thoughts that the emergency funds should be in such a way that we should be able to take care of the expenses for a few months. Some people say that we should have funds that can keep us going for at least 3 months and on average people believe that the funds should keep us going for 6 months.
The reason for having 6 months of funding people is to find another opportunity to earn and at the same time, the fund that we keep safe for 6 months should not only help take care of the basic needs of the family and individual expenses but should also help us keep going with our expenses as we do if we are in a job.
Enough to cover the entire family
The emergency funds should be able to cover not only the individual expense but also the entire family. We might have some family functions to attend and also some family trips to do, the emergency fund that we have during the time we are jobless should also be able to take care of those expenses too. Mostly it should only be us knowing that we have a financial problem but the family members should not even see that as a problem even if it is only for a few months.
Risk of keeping too much in emergency funds
There is also a problem in keeping money in emergency funds. It is sufficient if we keep only sufficient money in the emergency fund. The reason is because most of the time the money might sit idle and would reduce the potential earnings for us from other investments. An emergency need is a situation that is not very likely to happen most of the time. We have to be also focusing on the other type of investments too with proper gains. If we end up keeping more funds as emergency funds, we could lose a potential opportunity to gain more.
Low to zero-risk investments
It is very important that the emergency funds are kept in easily accessible places. When there is a need, we should be able to easily access the funds. Keeping it in low to zero-risk investments is very good. Some banks offer flexible deposits where the interest rates would be very low but you can access the money at any time. Keeping the funds in those places will help during situations where we have to withdraw them immediately.
I personally keep the emergency funds in a place that is easily accessible and at the same time not idle too. I will mostly make sure the funds generate some small income for me or at least increase in value a little. Keeping the funds somewhere and getting the same amount after a few years is only a loss for us as there will always be inflation that we have to take into consideration.
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