Emergency fund and its management.

POSTED BY avi ON January 8, 2011 6:17 pm COMMENTS (4)

Emergency fund plays an important role in financial planning , but the major question comes how do we keep it. Probable solutions maybe

1. Cash at home.

2. Cash in Bank

3. Keep in Liquid funds

4. Invest in Debt funds.

5. Combination of all of it.

Also how much do we need to keep as emergency, now the answer could be 3-6 months of salary or is it the gross expenses per month ?

Guys what is your take on it. Please educate me.

 

Regards,

Avinash

4 replies on this article “Emergency fund and its management.”

  1. Vishnu Prasath says:

    I think FD Interest rates are equal to debt funds if not better. And, liquidity and safety is much better than funds. And, we can’t expect much returns on the emergency funds anyway.

    First, start saving and continue until you accumulate which can fulfill 3-6 months of your gross expenses. The expense should cover expenses of a typical month (without compromise in your lifestyle). At bare minimum, it should cover the mandatory expenses (Rent, Groceries, EMI, SIP, Food, Education, Conveyance etc..)

    I see 2 option through which you can implement this.

    Option 1: (Flexi / Sweep-in FD)
    ================

    Now, many banks allows opening a Flexi FD where you can withdraw at any time without any penalty for premature withdrawal. (I use HDFC Sweep-in which is very flexible.)

    1. Open 1 or more Flexi FDs for your emergency fund for a period with best rates.
    2. Opt for Auto-Renewal.
    3. Link it to your Savings Account.
    4. Break the FD in case of emergencies. No penalty for premature withdrawal. You will get the same interest rate based on the period for which FD was kept.
    5. If there was no need for withdrawal, the FD will be renewed and you would have got the interest rates without any penalty.

    If you think you don’t have control over mis-using this, just forget your ATM card or give it your wife 😉

    Option 2: Ladder Method
    ====================

    This will work if your bank doesn’t have option for Flexi FDs or if it is not free.

    1. Determine the emergency fund and period. (E.g. 75,000 – 3 months)
    2. Open 3 FDs with auto renewal option.
    3. Open 1st FD for a period of 1 month. 2nd FD for a period of 2 months and 3rd FD for a period of 3 months.
    4. It mean, at any given month, 1 FD will be maturing and will be available in case of emergencies.
    5. When compared with Flexi FD method, the interest rate will be relatively less because of the short period we chose.

  2. Ramesh says:

    With the availability of any-ATM debit cards, keep 5k-10k in cash. Rest one-third in savings account and 2/3 in liquid/short term debt funds is an example.

  3. Ramesh says:

    Option 5.

    And whatever keeps you mentally cool and peaceful. I would opt for 3 months of gross expenses. 🙂

    1. Avinash Borse says:

      Thanks for the reply Ramesh, what will be the combination? if you provide some more details it’ll be helpfull.

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