A new year is a great time to plan for your financial goals, but it’s equally important to prepare for the unexpected. From medical emergencies to sudden repairs or temporary income loss, an emergency fund acts as a buffer against life’s financial shocks. But building the right fund requires more than just setting aside 3–6 months’ worth of expenses—it’s about understanding your unique needs and choosing suitable products wisely. Let’s explore how to do this effectively.
Difference Between an Emergency Fund and a Savings Account
While a savings account helps you set aside money for short-term goals like a vacation or gadget purchase, an emergency fund is exclusively for financial emergencies.
- Accessibility: Emergency funds should be easily accessible in times of need but not so accessible that you’re tempted to spend on non-essentials.
- Investment: Unlike savings, emergency funds can grow if parked in liquid mutual funds or high-yield accounts, offering both safety and returns.
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To enhance your financial organization, it’s advisable to maintain at least three separate bank accounts.
The first account is for your salary or primary income, ensuring a clear view of your earnings.
The second account should be dedicated solely to your emergency fund, keeping it distinct and untouched for daily expenses.
The third account is for managing investments or paying off EMIs, helping you streamline these transactions.
This structured approach not only simplifies financial management but also encourages disciplined saving and spending habits.
Why You Need an Emergency Fund
An emergency fund ensures you don’t have to dip into long-term investments or take on debt when life throws surprises. Here’s how it helps:
- Job Loss or Income Gap: With unpredictable earnings or additional dependents, you might need more than six months of expenses saved up. An emergency fund ensures you can manage rent, utilities, and basic needs during challenging times.
- Medical Emergencies: Health insurance covers many expenses, but co-pays, deductibles, outpatient treatments, or procedures outside your policy’s scope can still cost ₹10,000–₹50,000. A fund bridges these gaps without stressing your budget.
- Unexpected Repairs: From car breakdowns to major home repairs, emergencies like these can cost ₹15,000–₹1 lakh. Having savings set aside means these expenses don’t derail your financial plans.
How Much Should You Save?
The standard recommendation is to save 3–6 months’ worth of essential expenses, but this should be tailored to your circumstances:
- Start by Calculating Essential Expenses:
- Include Rent, groceries, utilities, insurance premiums, loan EMIs, school fees, and transportation.
- Exclude Lifestyle expenses like entertainment, shopping, and non-essential subscriptions.
Example: If your essential monthly expenses are ₹40,000, your emergency fund goal should range between ₹1,20,000 and ₹2,40,000.
- Consider Your Risk Factors:
- If you have a steady job, 3–4 months of expenses may suffice.
- Freelancers or business owners with irregular income should aim for at least 6–9 months.
- With dependents (children or elderly parents), you might need a buffer of 9–12 months.
- What About Health Insurance?
While health insurance is critical, it doesn’t cover every situation. Outpatient consultations, tests, or non-network hospital bills may need cash payments. Align your emergency fund to cover such gaps, along with other non-medical expenses during emergencies.
Choosing the Right Products for Your Emergency Fund
Your emergency fund should be safe, accessible, and offer reasonable returns. Here are suitable options:
- Fixed Deposits (FDs):
- What it is: A bank deposit earning fixed interest over a set period.
- Pros: Secure, predictable returns.
- Cons: Premature withdrawals may attract penalties.
- Recurring Deposits (RDs):
- What it is: A savings tool where you deposit a fixed amount monthly for a specified period.
- Pros: Easy to start, safe, predictable returns.
- Cons: Lack of liquidity before maturity.
- Liquid Mutual Funds:
- What it is: Mutual funds that invest in short-term debt instruments, offering easy access to your money.
- Pros: Potentially better returns (5-7% annually), high liquidity, and minimal penalties for withdrawals.
- Cons: Subject to slight market fluctuations, which can impact returns.
- Note: While liquid funds are accessible, they are not entirely risk-free. Ensure you choose low-risk options within the liquid fund category to safeguard your emergency corpus.
- Money Market Funds
- What it is: Mutual funds investing in short-term, high-quality debt instruments like treasury bills and commercial paper.
- Pros: Stability, better returns than savings accounts (4–5%), and high liquidity.
- Cons: Minimal market risk.
- Savings Apps:
- What it is: Platforms that offer flexible savings plans with competitive returns.
- Pros: Easy to track, linked to your financial goals.
- Cons: Returns may be lower than mutual funds.
Comparison Table
| Product | Risk | Returns (Annual) | Liquidity | Fees/Charges | Best For |
| Fixed Deposit (FD) | Low | 4–5% | Moderate | Penalty for early withdrawal | Conservative savers |
| Recurring Deposit | Low | 3.5–5% | Low | None | Consistent savers |
| Liquid Mutual Funds | Low | 5-7% | High | Management fees | Higher returns with liquidity |
| Money Market Funds | Low | 5-7% | High | Management fees | Liquidity and low-risk growth |
| Savings Apps | Low | 3–4% | Moderate | Minimal | Simple, tech-savvy users |
What Not to Use for Emergency Funds
- Gold or Property: These aren’t liquid assets, and selling them quickly can result in losses.
- Stocks or Equity Mutual Funds: Market fluctuations can erode value during emergencies.
- Cash at Home: While accessible, cash doesn’t earn returns and is prone to theft or inflation.
Actionable Steps to Build Your Emergency Fund
Building an emergency fund doesn’t have to be daunting. Here’s how you can get started:
- Set a Goal
Calculate your essential monthly expenses (rent, utilities, groceries) and multiply them by 3–6 months.- Example: If your monthly expenses are ₹25,000, aim for an emergency fund of ₹75,000–₹1,50,000.
- Start Small, Stay Consistent
Begin with what you can afford. Even ₹5,000 per month adds up to ₹60,000 in a year. - Choose the Right Investment Option
Keep your fund liquid yet growing. Liquid low-risk mutual funds are a great choice, offering returns of 5 – 7% annually while allowing easy withdrawals. - Automate Your Savings
Use Cashvisory’s platform to set up automatic transfers to your emergency fund. This way, saving becomes a habit rather than a task.
Set up a Systematic Investment Plan (SIP) to invest in a money market or low-risk liquid mutual fund. By linking your SIP to your bank account, a fixed amount will be automatically deducted and invested monthly. For example, ₹5,000 on the 5th of every month goes directly into your fund—no manual effort required.
This ensures consistent savings and keeps your emergency fund growing steadily.
Real-Life Case Studies
- Freelancer’s Flexibility:
Riya, a 32-year-old graphic designer, has a variable income and no fixed salary. She calculated her essential monthly expenses to be ₹28,000, including rent, groceries, utilities, and health insurance premiums. To cover 9 months of expenses, she aimed for an emergency fund of ₹2.5 lakh (₹28,000 x 9 = ₹2,52,000). She split her savings strategically: ₹1 lakh in liquid mutual funds for easy access and growth and ₹1.5 lakh in a fixed deposit for added security. This diversified approach ensures she’s prepared for emergencies without locking up all her funds in one place. - Family with Dependents:
Vivek and Priya, a couple with two kids, saved ₹6 lakh (12 months’ expenses) in a combination of RDs and savings apps to manage both liquidity and growth. - Single Professional’s Strategy:
Aarav, a 28-year-old software engineer, built ₹1.5 lakh in 10 months, parking ₹10,000 monthly into liquid mutual funds with Cashvisory.
How Cashvisory Simplifies Emergency Fund Building
Cashvisory offers tools and expertise to help you:
- Set a Goal: Enter your expenses, and the platform calculates how much you need to save.
- Choose Products: Explore curated options like liquid low-risk mutual funds or money market funds.
- Automate Progress: Track your savings, set reminders, and stay consistent.
Conclusion
An emergency fund is your financial safety net, providing peace of mind during uncertain times. Whether you’re starting small or aiming big, having the right strategy and tools ensures your fund is ready when you need it.
Start building your emergency fund today with Cashvisory’s platform—because peace of mind is priceless.