While talking to your CA or scrolling through the finance creator’s feed, you must have heard the term ‘Emergency Fund.’ Today, let’s discuss it in detail.

In simple terms, an emergency fund is a pool of money you set aside to use in case of emergencies. Now what kind of emergencies? It can be the loss of employment, sudden car repairs, or any financial emergency which is not predictable.

Why is it so important?

The answer is a simple question. What if you lose your job today? You will have no other option but to dig into your savings. And I am pretty sure you don’t want to do that, do you?

Emergency fund is a corpus you can rely on in these conditions without messing up with your savings and investments. Even if you lose your job, you can fulfill your needs without compromising on your lifestyle until you find your next job!

Having an emergency fund can save you from paying high interest loans that you will have to take in a financial emergency.

Now if you are convinced to prepare yourself an emergency fund, here are some things you need to keep in mind.

1. Your emergency fund should ideally be 6 to 8 times of your monthly income.

For example, if you earn 50,000 rupees per month, your emergency fund should have at least 3 to 4 lakhs.

1. An emergency fund should be highly liquid, so that you can easily access it at the time of an emergency.
2. As this fund is not prepared with an investment objective, you cannot afford to take risk with it. Do not, I repeat, DO NOT invest this money in the stock market or at any place where there is a chance of losing it. Play safe with this money. To know more about the risk appetite, you can refer to our FRM (financial risk management) course.

But wait a second, if you cannot invest this money in the stock market, you cannot do FD with it because it’s not highly liquid. Where should you keep it?

The most simple answer can be cash. Keeping it in your bank account where there is no risk and you can easily access it whenever you want seems like a good option.

Oh wait, there is another way, where you can keep it safe and yet earn a good return! You can keep it in a high paying interest savings account.

Liquidity. Check. Accessibility. Check. Risk management. Check.

And yet if you are not satisfied, the next option can be a ‘liquid mutual fund.’ This is a debt mutual fund so there is no way you are exposing yourself to the stock market. Back to the fund, the name itself suggests that it is highly liquid, you can easily access it whenever you want. And this gives you pretty good returns.

There is no other parameter you should look for while preparing your emergency fund.

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