What is an emergency fund? How much to keep aside for emergencies?

Leading a successful life is not just about how we manage our everyday normal activities and strive towards stability and prosperity. It’s also about expecting the unexpected and being prepared to face adversities. When the going is good, it’s very common for people to take their sound financial position for granted. The temptation is to focus on aggressively expanding our wealth by making risky investments. Or we might indulge with our surplus income and spend freely on fun and pleasure. But life is full of glorious uncertainties. So we never know what emergency is awaiting us at the next corner in our life path. To be forewarned is to be forearmed. Strategies to handle emergencies is a critical and mandatory aspect of financial planning.

What can be termed as an emergency?

A common point of debate among investors is – what sort of expenses qualify as an emergency? Can all unplanned expenditures be met by utilizing our emergency funds?

Emergencies with short duration impact – Unforeseen events which impact our monthly monetary budget for a short while. However, these emergencies may not have any lasting impact on our financial stability. Vehicle damage, job loss, theft or loss, minor house repairs, temporary illness in the family, temporary business loss are all typical examples of short-term emergencies.

Emergencies with long term impact – Death of an earning member, lasting physical disabilities, flood, fire and other natural calamities, major health crisis involving an uninsured illness are typical emergencies that completely derail our normal orderly life and throw all our plans into chaos and confusion. Mentally coping with such life altering tragic events is difficult enough. Add to this, the burden of managing the financial impact of such tragedies.

In essence, any unforeseen expense which cannot be put off and which impacts our mental, physical and financial well being can be broadly considered as an emergency. Such expenses occur completely out of the blue and often require immediate funds to tackle them. We wouldn’t have the time or ability to arrange for funds after the emergency occurs. So its important to set aside some contingency funds for such emergencies which are available for immediate use.

How much funds to set aside for emergencies?

Its difficult to estimate the financial implications of any emergencies as they are completely unplanned and unexpected. But we would require time and massive recovery efforts to get back our life on track after an emergency. During this period of adjustment, our regular mandatory monthly expenses must not suffer, so that the rest of our family can continue to have funds to meet their basic needs as far as possible.

Financial experts typically recommend that we set aside around 6 months of our monthly budget amount as contingency funds. So that we can avail of this money to tide over our immediate needs in the event of emergency. This is only an indicative figure and may vary depending on each person’s family and business circumstance.

If funds set aside are inadequate, then we will be forced to rely on taking a loan. And that would further sink us into a debt cycle which can be very detrimental to our financial stability.

You’ll be surprised how much a meagre saving of Rs, 2000 per month can grow into, after a few years! Go for savings instruments which allow easy, penalty-free withdrawals. Forget about that money, so that you are not tempted to pull out from your savings unless there is an emergency need.

Where to park my emergency funds?

The most easily accessible option is our savings bank account. It is recommended to keep at least a month’s expenses as a buffer in our savings accounts for easy liquidity. Mutual Funds or equity shares are also high liquidity assets, but they vary in value depending on the market conditions, so they are not a suitable emergency fund instrument.

Alternately chit funds are good option too. Make small monthly contributions to a chit scheme, for a fixed tenure of 2-3 years. Withdraw your money at the end of the tenure with good returns, and earn in the range of 7-10%. In case of urgent need for funds, you can withdraw the entire prize money anytime during the chit scheme tenure. No penalties, no debt. It’s your own money!

ABOUT US

Shanthala Chits has been in the business of chit funds for over 2 decades now. We are a Government approved chit fund company with a 25 year successful track record and thousands of satisfied customers. Shanthala Chits is registered under the Chit Fund Act of 1982, Government of Karnataka. We are one of the most popular chit fund houses based out of Bengaluru, known for our customer satisfaction and secure investments.

Our Chit schemes range from a monthly contribution of Rs 6000 to Rs 1,00,000 to suit every budget. You can pick a chit scheme with an appropriate monthly instalment for meeting several of your short-term financial needs. Our chit schemes are for a tenure of 25 Months.

Get in touch with us and start with an investment scheme. We will be glad to help you out with the right scheme that matches your needs.