One of my friend has this question to me as i keep posting articles about Financial Planning in my FB page.
He has no emergency fund in place and nothing big as saving other than EPF and misbought ULIP which he is still continuing as he finds that he paid all charges up front.
Now he want to actively invest for his various goals.I told him he will need few things in place like
Emergency Fund
Term Insurance
Health Insurance
So after going through his expenses he has about 10-12K a month for his investment goals. He said he is going to create RD of about 4K for creating Emergency Fund.
Rest 6K in Equity MF for various goals. After Emergency Fund is in place he will include that 4K also into investing for future goals.
He said 3 months of expense as EF . His monthly expense include Home EMI about 25k + Household Expense 8K + other misc 5K
25+8+5=38K*3= 1.14L as EF
I advised him to keep aside at least 6 months as EF ie 38*6=2.28L+buffer and round off =2.5L
Now the question is with 4k in RD it takes approximately 5 years (60 months) to create this EF
Instead if he put in all of 10K surplus in RD it will only take 2 year to create same amount .
I suggested him to put in 10K and make sure EF is in place first. But he doesnt want to miss out on opportunity available in market due to uncertainty to purchase more units with low NAV in his MF Funds
So What is best Keep 4K RD and create EF within 5 year (put in yearly bonuses will bring this to 3 years)
Or
RD for all 10K and create EF under 2 years (may be in 1.5 year)?