What is an emergency fund and how to invest in it?

Have you ever observed something while buying a new vehicle? They always give you multiple keys. You may keep driving your vehicle with a single key for years, but one day you lost it somehow. Even when you have a vehicle with you, you won’t be able to drive it anywhere. You will first have to get the backup key to kick start your vehicle and keep it going.

Your life is the vehicle and the primary key is the income you earn every month. In certain unfortunate events, you may lose your income. In such a scenario, a backup is necessary. The emergency funds are like the backup key you keep at home.

But we generally tend to forget where we have kept this key. Just like that, we also forget to gather a corpus for our financial emergencies.

What is an emergency fund?

A fund that you keep aside to financially tackle those unexpected events that you cannot resist is called an emergency fund. Though, not all unexpected things ask for emergency funds. You shall only consider important and urgent spending, for instance, any critical illness, unavoidable living expenses when you have no source of income for a period, and other such events.

Why Should You Maintain an Emergency Fund?

An emergency fund is a source you can rely upon to survive through potential contingencies. Such contingencies include stoppage of income, unexpected major medical expenses, family emergencies, urgent home or car repairs, unplanned yet essential travel expenses. Building and maintaining an emergency fund can help you keep your other financial goals untouched.

For instance, you were willing to invest 60% of your income in the stocks. Now, you met with a car accident that asks for car repair and medical expenses. In such a case, if you don’t have an emergency fund, you will have to shift your income towards these emergency expenses instead of investment. Emergency funds come to the rescue here, you can keep up with your investment goal.

In times of financial stress, emergency funds work as a safety parachute until you get back to normal condition. In the absence of an emergency fund, you may have to postpone your regular payments, such as EMI payment or electricity bill payment, and shift that money towards contingency. Postponing such expenses can occur significant costs for you. If you have an emergency fund handy, no such cost will be incurred.

An emergency fund prevents you from borrowing the required amount which can cost you higher interest rates. These reasons make having an emergency fund unavoidable.

Significance of Emergency Fund in Post Covid World 

Pandemic have left a daunting effect on everyone’s pockets. It was unexpectedly a big crisis for everyone, both financially and emotionally. For the majority of us, the biggest stress was to maintain better financial health ahead of everything else. It made us realize the need of putting our finances in place. Emergency funds might have worked as a life savior in such situations.

The covid pandemic is evidence that an emergency can come into your life at any time. It was so difficult for some people to find the money they needed immediately. The pandemic has strengthened the significance of having emergency funds at hand. In such events, your income may reduce, but not expenses. You may have passive sources of income, but they may not be liquid. Due to this reason, having a liquid emergency fund is extremely important.

How to determine the size of the Emergency Fund? 

Determining the size of an emergency fund is highly subjective. The size of the fund depends on a plethora of factors. You may decide your emergency funds by considering a few factors here.

  1. Living expenses

The first and foremost thing to consider while determining the size of emergency funds is your dependent’s monthly living expenses. Higher the expenses, larger contingency fund you will require.

  1. Job safety

If you are on a contractual job, you may not have a steady flow of income. In such cases, you will require larger emergency funds as compared to stable jobs.

  1.  Number of dependents and their healthiness

You will require large emergency funds if you have more dependents. If one or more of your family members have any critical health issue, you will require a large corpus.

  1.  Size of debt and liquid investment

The size of emergency funds should be enough to cover your debt for a time period. If you have enough investment in liquid assets like debt mutual funds or debt ETF or such options, then a smaller corpus will work, too.

Create your corpus by investing in Gulaq Emergency Fund

Emergency funds should be majorly invested at a place that offers higher liquidity. But such liquid funds offer an average return that might or might not be a hedge against inflation too.

To solve this problem, Gulaq Emergency Fund offers you the benefit of liquid funds in terms of liquidity and is also a hedge against inflation. It invests 20% of your amount in equity and the remaining 80% in the Bharat Bond 2025 ETF. This unique combination work as a great investment strategy that preserves your funds and also works as an inflation killer. Invest in Gulaq Emergency Fund (https://estee.smallcase.com/smallcase/ESTMO_0005) today.

3 Biggest Misunderstandings About Compound Interest

Compound interest is one of the most powerful forces on earth. It can do great things when used to create wealth. Understanding how compound interest works is an indispensable tool for living a wealthy life. This article will show you how to make sure that compound interest is always working in your favor.

 

Power Of Compounding: The Basics

 

The definition of compounding interest may seem obvious, but there’s more to this seemingly simple concept than it first appears. This effect of compound interest works both ways. Money left alone in a savings account for even just one year can be developed by compound interest. That is if the account earns at least a minimum amount of interest per year. In this sense, receiving an annual interest rate of 3% on your savings account may be more significant than it seems.

 

In fact, if you add around Rs 100000 to your savings account (and the money allows for continuous growth over time), then in just one year, you will have earned what looks like a small sum: only Rs 744.250. Yet, that small initial investment will double to become Rs 1488.500 after just two years. But after five years (Rs 3721.250), ten years (Rs 7442.500), fifteen years (Rs 29770.000), or even twenty-five years (Rs 119080.000). That’s the life-changing power of compounding! And all because you let compounding take its natural course, and you didn’t touch the original investment.

 

This concept of compounding interest over time is what makes it possible to turn a small sum into millions or a small amount of money into an enormous fortune. And this power really becomes apparent when we remember that compound interest actually works best in the long term. That’s because, as a general rule, more time allows for greater profits through compound interest: after ten years, Rs 744.250 will become Rs 2977.000 (a 200% increase), but twenty-five years later, it’ll be worth Rs 119080.000 (a 4000% jump).

 

Misunderstanding Regarding The Power of Compounding: 

 

Puja invests INR 10,000 monthly into the stock market starting at age 22 and earns 12% average annual returns each year until age 45.

 

Kartik invests 15,000 every month and earns 12% average annual returns until age 45. But he doesn’t start investing until he is 30 years old, which makes his total investment amount less than Edgar’s when they both reach the same age.

Year Puja (Yearly Return) Kartik (Yearly Return)
22 1,20,000
23 1,26,825
24 2,69,735
25 4,30,769
26 6,12,226
27 8,16,697
28 10,47,099
29 13,06,723
30 15,99,273 1,80,000
31 19,28,926 1,90,238
32 23,00,387 4,04,602
33 27,18,959 6,46,153
34 31,90,616 9,18,339
35 37,22,091 12,25,045
36 43,20,970 15,70,649
37 49,95,802 19,60,084
38 57,56,220 23,98,909
39 66,13,078 28,93,389
40 75,78,606 34,50,580
41 86,66,588 40,78,438
42 98,92,554 55,83,136
43 1,12,74,002 64,81,455
44 1,28,30,653 74,93,703
45 1,45,84,726 86,34,330

At the age of 45 Puja ends up with about 1.5 crore whereas Kartik earns 86 lacs

 

  • In Puja’s first year of investing, she earned a 12% return on his 1,20,000. That’s Rs 6,825.

 

  • In his second year, she contributed 1,20,000 more and earned a 12% return on the new total, which was. She made an extra amount that amounted to about 22910.
  • In her third year, she put in 1,20,000 again and made a 12% return on her total of 3,89,735. That is 41034.

In the last three years leading up to age 65, Puja earned Rs12.6 lacs, Rs 14.4 lacs, and Rs 16.3 lacs, respectively, in the last three years, and if you can notice, her investment returns in those early years are peanuts compared with what she made later on.

In Short The 3 Misunderstandings Are: 

 

  1. We think that the more amount we invest the better the result we get, but that’s not necessarily true. The longer we invest the better results we get.
  2. If we start early, we can earn from the power of compounding early, But that’s not true, the true potential of investment is actually seen in the end years.
  3. Some think that they can rely on your investment amount to earn in your 20s if you start early, but that’s not true, you should find other ways to earn in your 20s.