Are you financially prepared for a rainy day?

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The great Scottish poet, Robert Burns, once said that the best laid plans of mice and men often go askew. Planning is an important part of daily life. But many times, something unexpected happens and plans don’t work out. Same is the case with your finances. You may have grand plans for the future but you need to have a fall-back option. That’s because life takes unexpected twists without warning. So, take some time out and prepare yourself for the unknown.

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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 long-term plan. The extra emergency fund can act as a buffer if things actually go wrong at any point.

Be proactive

God forbid, you meet with an unfortunate accident and the medical bill is very expensive. In this situation, a lot of 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 interest rate can 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 rule of thumb is three months of income. Whatever your monthly income 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), it is better to save up to six or even 12 months of income. This can be very useful in case you lose your job or you plan to quit your job 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 are not going to be dipping into these funds regularly. So, it is important to invest in an avenue that offers liquidity and good returns. In this case, investment in real estate or physical gold 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 you take inflation into consideration. Since the return on these accounts is lower than the rate of inflation, you may actually lose money in the long run. It is best to invest your money in liquid funds for the dual purpose of safety and good returns. Liquid funds are a type of mutual funds that invest in debt instruments. These funds earn stable returns and they are not affected by market interest rates. At the time of redemption, most liquid funds allow you to withdraw around 90% of the amount instantly.

Conclusion

You cannot conjure up an emergency fund overnight. But it is possible to create one gradually, over a period of 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 each and every month. This way, you can steadily build up a fund that helps you meet your financial needs in case of emergencies.