Emergency Fund | How to create an Emergency Fund?

         

Money will save money. How?

        Do you know before you start investing there is an important step to be taken? It is so important that without it investing is not possible in any given condition. The condition is to create an emergency fund. 

        There are most common options available for parking money bank account and to invest, there are numerous options like FD, RD, Post office, Mutual Funds, Stocks, Real Estate. 

        How it's important let's say you want to build a 25 stories building without making a base. How long do you think it will stand tall? No specific answer. One small shake of earthquakes and the building will be soiled. Or in a flood, it will be taken away with the strong waves.
         

        2nd example: you are buying a car without safety features like no seatbelt, no airbags, no door locks. Is it safe to sit in and go for a long drive? Nobody wishes to have a life-risking vehicle.
In our life also we do this type of mistake knowingly or unknowingly. This big mistake can be avoided.
         

        3rd example: Suppose You have bought a  piece of land and want to sell it in the future for decent returns. As you know that real estate is a physical asset. To sell it at the desired price we have to wait for a long time. Now there is a condition that you have to pay fees in college to get admission of your child. You have 70% of the amount and still short with 30%. In this condition, you are confused that if you sell the land now you will not get the desired price. You might think of taking a personal loan on which you again have to pay interest. No option is favorable to your situation. In that case, an emergency amount would come to the rescue.
 

        First 2 examples shows us the safety features of an emergency fund. It is very important to have a foundation to create something big. If the foundation is not there, your investment won’t stay long. It can crash.
         

        The last example shows the savior characteristic of it. You can take any decision on basis of an emergency fund. You can rely on your backup plan by creating it.
Never take the emergency fund as the only source of investment. Treat it as it's saved for unavoidable circumstances only. Never use it as a source of investment.
         

        Practical guide to create emergency fund.

 

Suppose your Income/salary per month is X amount
 

An emergency fund should be X*5
 

Your income is 50000 pm. So the emergency fund should be 250000.
Where can we keep it?
 

Keep it in another bank account which you use the least times.
Or park it in a liquid fund or corporate bond fund. This option will give you decent interest also. Or keep it in cash (not much recommended but you can keep a part of it).

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