Are you prepared for the next financial emergency?

Whether you like it or not, life keeps throwing surprises, some pleasant, some not-so-pleasant. It’s the latter that may demand your attention and even finances in certain cases.

That’s where an emergency fund comes in.

Individuals must plan for an emergency fund to meet life’s unexpected financial twists. These could come in the form of:

• Medical emergencies

  Accident at home or work or while travelling to work, treating which could leave a dent in your finances.

• Unemployment

  Job loss related to company’s strategy or the economic environment.

• Repairs and contingencies

  Whether it is your house or your vehicle or your mobile phone / laptop, there are times when you must go in for urgent repairs due to rains or regular wear and tear or permanent loss. These are situations that can be salvaged if only you had an emergency fund.

How to go about building an emergency fund

An emergency fund usually equals about 6 - 9 months of one’s salary or alternatively the expenses for running the household for a similar period.

While saving for an emergency fund, focus on two objectives:

• Safety of capital (top priority)
• Return on capital (next priority)

Here are three options for investors saving for an emergency fund:

• Liquid funds

  If you wish to park money for a few weeks or months with safety of capital a priority, liquid funds offer a viable option to build an emergency fund.

• Short-term debt funds

  For an investment tenure longer than a few months, consider short-term debt funds. Compared to liquid funds, they invest in paper with longer maturities, giving you an opportunity to clock relatively higher return.

• Short-term fixed deposits

  Banks offer deposits of varying time frames beginning with a minimum of 7 days. So, an investor looking to park money for a few weeks / months can choose a fixed deposit with a matching tenure.

An emergency fund is a must in these volatile times and can empower families financially in times of emergency.