Planning is an important part of daily life. But many times, something unexpected happens and plans don’t work out. The great Scottish poet Robert Burns once said that the best-laid plans of mice and men often go awry. The same is the case with your finances. You may have grand plans for the future but need a fall-back option. That’s because life takes unexpected twists without warning. So, take some time out and prepare yourself for the unknown.
Prepare yourself for the unexpected.
Proper financial planning is not only about budgeting and investing. It is also about anticipating any emergencies and being prepared for them. Keeping a separate fund to meet such emergencies can safeguard your . The extra emergency fund can act as a buffer if things go wrong.
God forbid you to meet with an unfortunate accident, and the medical bill is very expensive. In this situation, many people either tend to use up their savings. Another common option is to take a loan. This can be a huge problem, especially if you take a loan from unofficial sources. The high-interestcan eat into your finances pretty quickly.
Instead, it is always better to be proactive and take control of your finances. Create an emergency fund that is to be used specifically for these expenses.
Create an emergency fund
How much should you save towards this fund? A of income. Whatever your monthly payment is, multiply it by three. For example, if you earn Rs 50,000 per month, your emergency fund should ideally be around Rs 1.5 lakh. But if your income is irregular (freelancers, for example), saving up to six or even 12 months of income is better. This can be very useful if you lose your jobor plan to quit and look for other options.
Where should you keep it?
Your fund should be easily accessible in case of an emergency. But at the same time, you will not be dipping into these funds regularly. So, investing in an avenue that offers liquidity and good returns is important. In this case, real estate or physical gold investment is out of the question. You should ideally keep the fund where it is safe and quickly accessible. Many people prefer savings accounts, but this may not be the best option when considering inflation. Since the return on these accounts is lower than the inflation rate, you may lose in the long run. Investing your money in liquid funds is best for safety and good returns. Liquid funds are a type of mutual funds that invest in debt instruments. These funds earn stable returns and are not affected by market interest rates. At the time of redemption, most liquid funds allow you to instantly withdraw around 90% of the amount.
You cannot conjure up an emergency fund overnight. But it is possible to create one gradually, over some time. As an investor, a suitable option is to create a standing instruction for your bank account to transfer a fixed amount of money directly into the fund every month. This way, you can steadily build up a fund that helps you meet your financial needs in case of emergencies.