How to Create Emergency Fund in India

Even though the title says – How to Create Emergency Fund in India? I will cover both Why and How to Create Emergency Fund in India. I will start with the Why aspect first followed by How to.

How Create Emergency Fund India

Why Create Emergency Fund in India

Earlier people use to have jobs for the lifetime, they would join a company and worked until they retire. They also lived in a joint family system wherein at times of an emergency, the entire family would try to support you even financially. Current times are very different, there is no guarantee of the job nowadays. Also, most people live in a nuclear family so bonds of joint family don’t exist anymore. And in India, we don’t have any social security like Unemployment Insurance or Medicare that exists in countries like USA or UK.

Emergency situations come uninformed and can arise anytime. There could be a setback to one’s earning capacity due to a temporary disability or there could be job-loss running into a few months. If you are not prepared, then this could impact your whole financial plan. So it is important to address this aspect which building your financial plan.

What if You don’t keep an emergency fund?
By not having an emergency fund, you will have to possibly borrow from associates, family members or perhaps get a personal loan and then pay HIGH interest on it. In case your need is large, you may even have to pledge family jewellery etc to overcome the difficult situation.

How to Create Emergency Fund in India

The Emergency fund should be equal to at least 6-8 times your monthly household expenses. Frankly, it’s a case to case basis but 6-8 times of your monthly household expenses is the good benchmark to start with.

The household expenses I talk about should include all of the following:

  • All your EMIs –
    • For House,
    • For Car, and
    • anything else that you pay EMI for
  • Your Insurance Premiums – Both Term Insurance and Mediclaim Insurance
  • Kids Education Fees
  • Utilities and Groceries
  • Miscellaneous

It does not include your discretionary spending items like vacation, movies, fine dining etc. If you have an emergency then you would not be in the mood for these any which ways.

For example – if your expenses are as follows:

CategoryAmount
Total 110,000
House EMI50,000
Car EMI20,000
Kids School Fees8,000
Utilities and Groceries22,000
Others10,000

Then you should keep aside at least 8 to 9 lakhs as your emergency fund. And this fund should be held in Liquid mutual funds or short term deposits so that you can access it easily in case of emergency. Remember returns are not important on Emergency Fund but Safety of Principal and Liquidity are very important.

 

Posted in Financial Planning and tagged Emergency Fund, liquid funds.