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Do you have an emergency fund?
Published On , 22 May 2017 By ET Wealth
An often neglected financial Goals among people is building an emergency (contingency) fund. It’s a must have for every individual because one never knows when there could be a need for some extra money due to some unforeseen event. To build an emergency corpus, you should invest in those instruments which you can redeem or liquidate within a very short notice. Putting some money in a bank fixed deposit is one of the solutions. Investing in a Liquid Fund or an ultra short term fund of a good fund house can also serve the same purpose.
WHEN TO USE A CONTINGENCY FUND
An emergency fund is needed when one’s regular source of income dries up and yet there’s a need for some funds to meet the daily expenses
It could also be used to meet some medical emergency
On could use it to tide over some months in case of a job loss or some setback in business
In such situations one should be able to tap into a corpus without curtailing regular investments
Usually regular investments are for meeting long term financial Goals like child’s education, own retirement etc.
The optimum size of an emergency fund should equal the monthly expenses of three-six months
Liquid Funds have the advantage over other comparable investments in terms of lower taxes and any-time withdrawal without penalty
Returns from these funds are hardly affected by short term interest rate volatility
Very soon instant withdrawal, up to certain limits, will also be possible from these funds
DO's And Dont's
Never keep money in an Equity fund to build an emergency fund
For an aged person without a medical insurance, the contingency fund should be a large one
For a young person with regular salary income and a mediclaim, it should be used to meet daily expenses if cash flow stream is disturbed
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