If you had to come up with a lakh in 24 hours, because of some emergency, could you do it?
Here’s an action plan that will make sure you’re not left hanging if such a situation does come up.
How much is enough?
Usually, it is best to save up 6-months’ worth of your expenses as your emergency fund. If you don't track expenses - make this number 4 months of your take home salary. A large round defined number, such as Rs. 1 lakh is a good target too.
How do you go about doing it?
If you are saving up for a lakh, set aside Rs. 8,000 every month for a year (12-months x 8,000 = Rs. 96,000). This will typically be 20-30% of your salary. If your salary is lower, don't worry. Even if you save just half, viz. Rs. 4,000 every month, you will take at most 2 years to reach your goal amount.
Where to keep it?
Don't leave this money in your savings account where you could accidentally spend it. Move it out of your savings account into an RD or, even better, into a debt mutual fund. This will help you get to your goal even faster, with earnings from your investment.
Keep in mind that instant liquidity is the need of the hour in any emergency situation. There are specific debt mutual funds that also provide you with an instant withdrawal, and sometimes even a debit card for you to withdraw your money at any time. After all, emergencies can strike anytime.
Keep it safe!
Try not to touch this SOS fund for any reason other than an actual emergency. This will be your parachute - and a parachute must be intact to be useful.
Note: The latest fashion accessory is NOT an emergency :)
Start creating your emergency fund now. Set a target amount and start saving up for it.
This 10-part weekly series helps you identify and complete a single task every week to take charge of your financial life. Over these 10 tasks, you will know more about your money and how to make it work harder while having to do less work and also worry less.