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  • Category: Miscellaneous

    How long will our emergency fund last?

    Every working person maintains an emergency fund. This emergency fund is required to meet unforeseen expenditures under emergency conditions. A person or his family-members can meet with a sudden accident. A person may have to visit his/her home town due to sudden requirements. He/She may have to attend a lavish marriage of a near relative. Each of these cases requires a big amount.

    Investment experts advise us to build an emergency fund to meet these expenses. They strongly advise us against withdrawal from Provident Fund for the aforestated purposes. Generally the experts tell us to keep money aside in a liquid mutual fund for gradually building up of an emergency fund.

    As a thumb rule, every working person should keep his/her 6-8 months' salary in the emergency fund. If we are able build up an emergency fund with 6-8 months' salary, we can meet unforeseen expenses from this fund. This will help us to achieve financial freedom in future.

    But, do we do this? Do we keep 6-8 months' salary in our emergency fund?
  • #606077
    The author idea is very good and needs to be thought and implemented. But unfortunately in India, most of the salaried people are living with hand to mouth existence. That means their monthly salary is not enough to meet the expenses of every month and they are forced to go for over drafts and loans from personal sources. That is the way the people are adjusting their lives. That is one more reason that wife is also made to work for some money as salary to fill the gap of much required money to meet the family expenses. In this situation how can a employee think of saving 6 to 8 months salary for the future emergencies, which is a distant impossible. However each employee must be forced to save some money from every month salary and that should be deducted at the time of salary disbursement itself. The small savings thus saved would become big when in case of emergencies, it can be withdrawn.
    K Mohan
    'Idhuvum Kadandhu Pogum "
    Even this challenging situation would ease

  • #606441
    I agree with the author's suggestion. It is always advisable to have some money in the bank to meet exigencies. We don't know what extra expenditure will come at what time. If any emergency comes we can't run here and there for money. Of course nowadays all of us will have one or two credit cards and that may serve some purpose but that alone may not be sufficient. I don't understand on what average salary the author suggested 6-8 month's salary. That again depends on the salary level. This is all relative. But the important point to be noted is reserve money for emergencies. What we should do is on the day of salary we should keep some money in bank account and when it accumulates to a lack or so you can open a FD with sweep in facility so that you can draw that amount any time you want. Otherwise open a RD for a year and fix that amount after RD is matured. This amount will come in handy in case of emergencies.
    always confident

  • #606488
    Saving habit has to be cultivated. Whatever be the salary or income, one should have the will to earmark some amount as saving and for future unexpected exigencies. Of course, saving may entail some sacrifice or forgoing of some non-essential expenditures. For sometime we have to be strong willed to first earmark an amount for savings and then only spend the remaining amount. Once a habit is formed, then it automatically goes on. This habit should be cultivated in children and other members of the family. Then they also will follow the same.

    Even small creatures like ants, rats, birds-all save for the adverse days. No one had taught them about thumb rules. They somehow have the inherent capacity to know the nearing of adverse seasons and so they start preparing saving for the bad days. In fact the honey we steal from the honey bee is actually their savings for bad days.

    Whenever there was context( mostly in ask expert section) I used to emphasise on regular savings. I used to suggest first monthly saving in saving bank accounts, then Recurring Deposit for an year or so moving the maturity proceeds to FD. It is only after one has accumulated some reasonable sum( say equivalent to three to six times of essential monthly expenses) in FD and savings bank account that one should invest in other avenues.

    ( I feel that the emergency fund provisioning should be related to monthly essential expenses and not related to salary)

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