Emergency funds are essential for maintaining financial stability, but where should you keep them for optimum security and accessibility?
Aparna and Rahul are a young married couple living in India. They had been leading a comfortable life with their joint savings account and mutual fund investments. Out of the blue Aparna lost her job and the couple was unprepared for the financial impact of Aparna’s job loss. She had been contributing to their monthly expenses, and now suddenly, they had to suffer a significant reduction in income. They were forced to use their savings and investments to cover their living expenses.
This caused them significant financial stress and delayed their long-term financial goals, such as saving for a down payment on a house.
What could they have done differently? They had savings and mutual fund investments, but they never thought of setting up an emergency fund. If they had, it could have been easier for Aparna and Rahul.
An emergency fund provides a financial cushion that allows you to manage unexpected expenses without having to dip into your savings and investments or go into debt. Setting up an emergency fund should be a priority for your overall financial plan.
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Having an emergency fund is crucial to ensure financial stability during uncertain times. This fund is a sum exclusively reserved for unexpected expenses or financial emergencies, such as job loss, medical emergencies, home repairs, or other unforeseen circumstances.
Having an emergency fund lets you breathe easy, knowing you have a financial cushion to fall back on during a crisis. Experts suggest having at least three to six months’ value of living expenses set aside in your emergency fund as a part of your financial planning.
Where Should You Park Your Emergency Fund?
There are several options available in India where you can park your emergency funds:
- Savings Account
Consider keeping your emergency funds in a savings account. This option offers easy accessibility and liquidity, which is crucial during emergencies. However, the interest rate on savings accounts is relatively low, say 2.5-3%, so you may not earn significant returns on your funds. The recommended option would be to keep a month’s expenses in a savings account, which can be withdrawn immediately upon need.
- Fixed Deposit
Fixed deposits are another popular option for parking emergency funds. This option offers higher interest rates than savings accounts, about 6-7%, and you can choose the tenure that suits you. However, fixed deposits may provide a different level of liquidity than savings accounts, as there may be penalties for early withdrawals. There is an auto sweep facility where money is automatically withdrawn to your bank account once it gets lower to a certain threshold.
- Liquid Funds
Liquid funds are mutual funds that invest in short-term debt securities. This option offers higher returns than savings accounts and fixed deposits and is considered a relatively safe investment. However, liquid funds may be subject to market risks, so you should consider the risks before investing. Also, withdrawing your money might take 1-3 business days and can be done online.
- Money Market Funds
Money market funds are another type of mutual fund that invests in short-term debt securities that offer 6-7%. However, money market funds may be subject to market risks, so you should consider the risks before investing.
There are many options where you can park your emergency funds, and the choice depends on your individual needs and preferences. If you want the best advice on how to get the right mix to park your emergency funds, speak to Geojit experts now!