Index of the article
I recently heard that in the mid-40s people face a midlife crisis, some midlife relationship crises. Don't worry, I'm not going to talk about relationships in this article, I definitely want to stick to my core domain knowledge of finance. But you can imagine that a midlife relationship crisis is combined with a midlife financial crisis, and things can definitely go from bad to worst. To avoid such a dangerous scenario, everyone should be aware of certain basic thumb rules of personal finance. In today's article, we are going to talk about something known as planning for emergency funds.
Importance of Emergency Funds
I welcome you all to my personal finance blog. The thing I was trying to point you point out to you was that to avoid a midlife financial crisis, you shouldn't be planning your finances variable. But for a person who has never planned his finances to date, it becomes a very big question mark, as to what should I plan for? Should I plan for a new car? Should I plan for buying a new house? Should I plan for my child's education? Should I plan for my child's marriage, so many financial goals are actually in front of him and he then gets confused as to how he's going to prioritize the goal?. All priorities can be postponed, but there is one priority that cannot be postponed in your personal financial planning and that is nothing but the creation of an emergency fund. That should be the topmost priority in your personal finance.
Emergency Funds meaning
What is this emergency fund? This is a fund that is created, which helps you to take care of finances which take of certain demands, which pop up without any prior information. What do we mean by that? child's education comes with a prior indication, Child's marriage will come with a prior indication buying a car will come with a prior indication but a certain disease that can be deducted might not come with a prior indication. An accident might not come with prior indication. Some business crises might not come with a prior indication. For this, we must be very well equipped with something known as an emergency fund. Now, what is this emergency fund? It's a fund that will help you to cater to such emergency problems which pop out without any prior notice.
Emergency Funds Planing
1)Emergency Fund Amount Calculator
Now Question is How much emergency funds should I have? A thumb rule of personal finances is that whatever are your monthly expenses just multiplied by six that should be the amount of your emergency fund. Just to give you a simple example, if I spend on average 40,000 rupees per month, then I should be having 40,000 multiplied by six which is nothing but 2,40,000 rupees in my emergency fund account. Okay. Now, if I have this in my emergency fund, what does it mean? It means that I can take care of my six months' expenses without bothering a lot, I am very well having a cushion to cater to these uncertainties which might pop up in the future that is how you can ascertain the number of emergency funds.
2)Emergency Funds Investments
So going back to my example, I have to invest 2,40,000 In an emergency fund question is where do I park these funds? The best option for this can be to split it up as 1,20,000 more liquid because this first one lakh when it goes rupees can be actually parked in your savings bank account. What is the biggest advantage? You can withdraw money whenever you want? Okay, what is the biggest disadvantage? You're going to get only 4% returns okay. So 1,20,000 For sure. It has to be in your savings account. Basically your three months emergency fund should be in your savings account. What about balance refunds, whatever balance three months emergency fund that can be kept in something known as a liquid fund.
What is the biggest advantage of liquid mutual funds?
Will it give you a better return as compared to 4%? Yes, it almost matches the returns as FDS okay. So, you might get somewhere around 7% returns in liquid mutual funds. And the biggest advantage is again liquidity you can with refunds on almost the same day or in some mutual funds in liquid mutual funds, it will be t plus one. So for example, if you sell today will get the funds tomorrow. Okay, so that is the biggest advantage you can invest your money at a rate greater than saving bank interest, but also get a quick claim of your amount whenever you need it.
Hope you understood emergency funds and if you have any problem understanding some concepts of emergency funds you can ask me in the comment section below.
Thank you
