Thread by @FincademyIn

Emergency Fund 101

What?
Why?
Where?
How?
When?

Thread🧵

What is an Emergency Fund? 🚨

It is that basket of money which you have set aside to pay for any emergency (unexpected expenses).

Definition of emergency is very subjective.

Ideally, Emergency Funds should only be used for unexpected genuine crises in life.

Why You Need an Emergency Fund?

So that you don’t have to plunge in the baskets which are assigned to other goals.

Your emergency fund will also save you from taking expensive loans like personal loan or credit card borrowing in the times of crises

You may need money in case of:
▪️ job loss
▪️salary cut
▪️natural calamity (like Corona)
▪️ unexpected and urgent house repair
▪️ car accident
▪️ urgent medical expenses.

Some of these risks can be transferable by buying insurances like health insurance, car insurance. But you cannot insure all type of risks.

and some of the expenses even after having the insurances in place may not been covered by insurances.

Any other reason

To take risk. Yes, to take risk and plan long term goals.

People are hesitant to save for the long term because they always fear that they won’t be able to use their own money in case of emergency.

When you have a decent emergency fund, you can ride through the equity volatility and create long term wealth.

Do NOT use these methods to pay for Emergencies

▪️ Withdrawing from EPF or PPF
▪️ Withdrawing from your Mutual Funds demarked for long term goals or for other goals
▪️ Withdrawing cash from credit card limit
▪️ Informal Borrowing at high interest rate of 2-3% per month

▪️ Selling any asset (like real estate, second hand car, jewelry) in urgency to raise money for emergency

How much 💰 should be in Emergency Fund

This is very subjective.

▪️ Whether job is stable, seasonal or insecure.
▪️ Whether spouse is working or not.
▪️ Whether, apart from active income, any other source of passive income or not
▪️ number of dependents?

But I will say one must have at least 6 months of emergency expenses and I know people who have even 2-3 years of expenses in their Emergency Fund.

How to build Emergency Fund?

The first step is to plan and start saving

Start slow and build on till you have reached the desired multiple of monthly expenses.
In case you receive any 💰 in the form of bonus, incentive, gift, etc.. utilize those funds to create Emergency Fund

Where to park Emergency Fund?

20-30K of hard cash 💸
3 months worth of expenses in Bank FD

Incremental amount can be in ultra short term fund

Slightly aggressive investors can consider equity saving fund, balanced hybrid or balanced advantage fund as well.

some of you may be thinking that the redemption amount in equity saving or balanced advance fund will be credited in bank account at t+3. Does they still qualify for emergency basket?

Answer is yes, we all have credit card to provide bridge funding of up to 45 days.

We can always borrow from friends and family for 5-10 days. Remember I am not allocating all emergency fund in BAF, only the incremental money greater than 3 months of expenses can be invested in BAF. By doing so, even your emergency fund will not remain low yield.

if you have a High Yield Saving bank account then you can utilize that as well to park your emergency fund.

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