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.
- 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.
- 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.
- 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.
- 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.
To help yourself better, jump on to our emergency fund calculator (https://www.gulaq.com/emergency-fund-tool/) that can help you to determine your corpus.
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 not be a hedge against inflation.
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 works 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.