Emergency Fund - Financial Shock Absorber

The what, how much, and where

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Hi!

Unexpected stuff happens to us all the time. We, our situations, and our stuff are not built to last a lifetime, and unexpected breakdowns occur. The catch is we don’t know when that’ll occur. But here’s the thing - we know that they’ll occur at some point. So a good idea is to start saving for it.

Enter - The Emergency Fund

Think of the emergency fund as a self-insurance. When there’s any unexpected reason where one needs a sizable amount of money quickly, this self-insurance is available to help out. This could be like:

• Sudden hospitalization / surgery in the middle of the night.

• Immediate travel without notice.

• Vehicle breaks down and needs urgent repair.

• A relative or friend needs some urgent cash for an emergency

In these situations, money is required in a few minutes - we can’t wait for insurance or mutual fund redemption to kick in.

How much to keep aside

Note that the priority here is to get a sizable amount of money quickly, and not to compensate for impacts due to income loss. Expenses due to these impacts are over extended periods of time, and should ideally be spent through another corpus like a contingency fund which we’ll talk about later.

Another thing to keep in mind is that emergencies don’t tend to happen together, so keeping aside the money for one high-costing emergency should be sufficient. We will need to replenish this amount whenever an emergency occurs to prepare for the next one.

This amount is very personal and depends on the circumstances such as number of folks in the family, their health conditions, equipment critical for daily life like medical devices or vehicles, etc.

For me, an amount of Rs 6L sounds about right for my peace of mind. It’s large enough that most surgeries in this list are covered if I need to run to a hospital which doesn’t accept my health insurance. For example, a bypass surgery might be needed in case somebody in my family or friends’ families has a cardiac arrest. It costs up to Rs 5L in that list, which will be covered.

Where to keep the fund

The priority for this fund is to get money quickly and reliably. The method to access the fund should be really easy, in case one needs to provide instructions over the phone. So the places we can store this fund needs to be safe, available at all times, and easy to access.

Here’s a way I find comfortable to store my emergency fund:

• Level 0 - Rs 6L:

  • Credit card with a limit of Rs 6L. If the place accepts credit card (which most do), then it’s the best way. I get a 15-45 day interest free loan which I can pay off later.

  • Complexity - If the other person has the card, then I just need to provide the PIN.

• Level 1 - Rs 50k:

  • Kept at home as cash for my use and in case somebody nearby needs it.

  • Complexity - I only need to provide location of cash at home.

• Level 2 - Rs 3.5L:

  • Kept in savings account.

  • Complexity - If the other person has my phone / debit card, then I just need to provide the PIN for UPI or ATM transactions.

• Level 3 - Rs 2L:

  • Liquid funds with instant redemption feature.

  • Complexity - Not the easiest, since I need to provide instructions to access the website and my account credentials. But it’s a trade-off between accessibility and tax efficiency.

Wrapping up

It’s very rare that we don’t have emergencies over our lifetime. When there’s an emergency, financial matters should be the last thing on our minds. We know emergencies come at some point, so it’s best we financially prepare for it early and then focus on what’s important when it happens - our loved ones.

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