Mahesh works in the airline industry. In March 2020, when the Government announced a nationwide lockdown, all the airlines were grounded, and the cash inflows of Mahesh’s company dried up. The company delayed staff salaries for a couple of months. Mahesh was in a fix. His organisation was not paying him, and he could not find a job anywhere else due to downturns in the industry. Mahesh did not have any savings to fall back on. It is during such a situation an emergency fund comes to your rescue. Let us understand how.
What is an emergency fund?
An emergency fund is a fund that you can fall back on during times of unplanned and unexpected emergencies. These emergencies can include situations like:
a) Delay in salary,
b) A temporary cut in salary,
c) An accident leading to disability due to which a person cannot work temporarily,
d) Sudden loss of job,
e) Hospitalisation of self or a family member, or
f) Any other situation in which you need more money than usual
During any of the above situations, an emergency fund can bail you out. Once the situation normalises, you can rebuild the emergency fund and hope that a similar situation will arise anytime soon. If you don’t have an emergency fund already, then setting it up should be your number one financial goal
Size of the emergency fund
After understanding what an emergency fund is, the next question in your mind will be the amount you should keep in an emergency fund. Based on suggestions from personal finance experts, people usually plan their emergency fund size either based on their monthly expenses or monthly income.
For most people, as their monthly income is more than their monthly expenses, we will discuss the emergency fund amount based on monthly income.
Your emergency fund corpus is based on your profession, whether you are salaried, professional, self-employed, or into business.
Please note, the above is just an ideal range for the size of the emergency fund as recommended by personal finance experts. You can decide your emergency fund amount depending on your situation. As a precaution, you can plan for an emergency fund that is higher than the above-suggested range.
Calculation of emergency fund
Rajesh is a 35-year-old individual working in an IT company for the last 10 years. He has been doing well, earning a monthly salary of Rs. 80,000. His company has also been doing well, growing every year. Rajesh’s spouse has taken a break from her job last year after the birth of their baby girl. In this case, Rajesh should ideally have an emergency fund equivalent to 6 months of his income.
Rajesh emergency fund = Rs. 80,000 (Rajesh’s monthly income) x 6 months
= Rs. 4,80,000
Rajesh should have an emergency fund of Rs. 4,80,000. At this stage, Rajesh should redirect the cash flow of Rs. 2,40,000 (freed up from emergency fund) towards either debt repayment or investing towards his different financial goals
Setting up the emergency fund
Now that you have calculated the amount you should have in your emergency fund, it is time to take action. You can set up your emergency fund in a systematic manner using the Glide Invest App. Just take the following simple steps:
1. Sign up on the Glide Invest App
2. Select the Goal Module on the bottom
3. Select the Emergency Fund goal
4. Enter the desired amount that you would like to accumulate for your emergency fund
5. Select whether you wish to invest a lumpsum amount or start a systematic investment plan (SIP)
6. If you select the SIP option, then you will need to enter the amount that you would like to save every month for your emergency fund
7. Choose the SIP date
8. Make the payment through net banking, UPI or set up AutoPay (your monthly SIP amount will be auto-debited from your bank account)
9. Your money will be invested in the ICICI Pru Liquid Fund – Direct (Growth) plan that comes with the insta redemption facility.
The liquid mutual fund invests in debt and money market securities with a maturity of up to a maximum of 91 days. The liquid mutual fund scheme aims to provide safety of capital, liquidity, and ease of access to money.
Insta redemption facility
The whole purpose of an emergency fund is to make money available for use immediately when there is a need for it. The insta redemption facility from ICICI Pru Liquid Fund provides precisely that. Using this facility, you can withdraw up to Rs. 50,000 or 90% of your invested balance, whichever is lower, on any given day through the IMPS facility. The money will be credited to your bank account within 30 minutes.
If you wish to withdraw more than the maximum limit (Rs. 50,000 or 90% of your invested balance), you will have to go through a normal withdrawal process. The money will be credited to your bank account in 1-2 working days, depending on the cut-off time of your redemption request.
Glide Invest App: One-stop destination for all your financial goals
Apart from setting up the emergency fund, the Glide Invest
platform provides many other services. Some of these include:
1. Providing the risk survey to understand your risk profile,
2. Selection of various financial goals that you wish to accomplish,
3. Providing customised investment plan for each goal, and
4. Implementation of the goal plan and handholding till the goal is accomplished
Glide Invest recommends the appropriate asset allocation
, investment in direct mutual funds, and handholds you to achieve your financial goals. All you need to do is download the Glide Invest App from Google Play Store or Apple App Store and get started.