What is emergency fund? Basic personal finance you need to understand

What is an emergency fund?

Everyone wants a happy life but nobody doesn’t know how to achieve that. If you want to achieve those you don’t have any fear about money. What will happen if you don’t have any job for a few months, where will you get money for personal expenses?  How can you find the money for a personal emergency?  To avoid these, you should have a proper financial freedom plan, which will help you achieve a happy life.

In this blog, we will discuss how you can achieve financial freedom.  Most of the e people have a myth stating that only rich people can be in a state of financial freedom. That’s not correct at all. Learn how to manage the money you are earning. If you have a proper financial plan you can achieve financial freedom you don’t need to be rich.

Emergency fund

The first step to financial freedom is to find an emergency fund. So there are two questions that will arise when we start talking about an emergency fund

1. How to create an emergency fund
2. Where to save an emergency fund

It’s logically simple but people don’t aware of that. Once you start earning or you are getting any profit from your business you need to start building your emergency fund. After that only, u need to invest in stock or other investment plans

 

What is Emergency Fund?

Calculate your monthly expenses to live and multiply that amount by 6 and save that amount in a place that you can access easily. Suppose your monthly expenses are 60000 then you need to save 60000 * 6 = 360000 as your emergency fund

 

Why we are saved an emergency fund

It’s for our emergency requirement. Like if you lose your job, or your business is not performing well or a pandemic like a corona happens or any accident happens in that case you can use this emergency fund as a financial safety

Most people are lying on basis of salary t salary. How much they are earning per month is the same amount they are spending every month. Some people use a credit card to make more purchases and convert those amounts into EMI and repay that every month.

Suppose you don’t have an emergency fund you need to depend on others like family and friends. If they cannot give that money then the situation will be worst. If you have an emergency fund in your hand you can survive that situation.

Where should keep an emergency fund

If you can save money for your personal emergency fund. The next question will be where to save that money

The first thing coming to your mind is to save that as liquid cash and store it somewhere. This is the riskiest and most foolish decision ever. The chances of theft are high in that case and another reason is inflation in the economy Inflation happens if you save that money as liquid cash it will be the same after 2 or 3 years but the value of money will be changed due to inflation.

Another method that will come into your mind is to deposit those amounts in a savings bank account. So you can withdraw anytime, and you will get interested in that and it will be safe. But this is also not a good idea to store the amount. Most of the banks provide an average interest for saving accounts is 3% to 4 %. But the inflation rate is coming at around 5 % so it won’t be a good decision.

Another method coming to your mind is to deposit that amount as a fixed deposit, so at the maturity period you will get some amount as interest, but there are a few negatives included in that

• If you hold your fixed deposit for a long term only they will provide interest. But if you withdraw or break that before the maturity then they will charge some amount as a penalty it will deduct from our saving amount
• It will impact your taxation if you invest that amount as a fixed deposit you need to be shown in the income tax return file. It will come under income from other sources.

Where I can save my emergency fund the answer is Liquid Mutual Fund

 

Liquid Mutual Fund

In this, we are investing the amount in debt instruments. Mostly in bonds and debentures. The timeframe will be 3 months to 6 months because of this it won’t be got failure. It is less volatile and provides more consistent growth in nature and the return will be 6% to 8% yearly returns. If you look for the mutual fund you can find many ways to invest in those liquid mutual funds

There are a few examples of liquid mutual fund

• ICICI Prudential mutual fund
• Axis mutual fund ( it has a liquid growth fund)
• Aditya Birla capital.

All of these give around 6% to 8% return consistency. So you can easily withdraw the amount after 7 days from the day of investment. You don’t need to pay any other additional amount for the early exit. Liquid mutual fund investments have taxation benefits as well.

If you are an active participant in the stock market there will be some other ideas as well. You can find 12 monthly emergency funds and deposit them in different stocks. Especially nifty index funds and find more diversified portfolios to invest in. This will help you to gain more.

If you hold more than 2 or 3 years the return will be high in nature. The one risk is attached if the market falls what happens to your investment amount? If the market falls 50% still have the amount worth six months’ emergency fund. The main advantage is market won’t fall at that 50%. So this investment will help you to earn more and at the same time, you can save this for an emergency fund.