When financial planning it is key to have an earmarked investment for emergency or “rainy” days, i.e. money set aside for unexpected situations. The key here is to keep your emergency fund separated from your regular savings to protect it from sudden withdrawals such as job loss or an expensive medical bill.
The aim of your is to help tide over sudden needs without taking loans or borrowing. It helps build flexibility to handle an unexpected turn of events without putting immediate stress on your day-to-day finances.
How much emergency fund should I have?
The thumb rule to deal with situations without immediately acquiring debt is collecting equivalent of three to six months of expenses, suggests Clear Tax. It added that for those in more unstable situation i.e. freelancers, those with dependents, medical conditions etc., the savings should swell to cover 6-12 months of expenses.
Chartered Accountant Nitin Kaushik in a post on social media platform X, shared some ways to build your corpus:
- Cut every non-essential expense for two months and save one month worth of expenses as a “mini fund”.
- Automate deductions for or SIPs.
- Every bonus, tax refund, or side-hustle inflow should go directly towards the emergency fund till you hit your target.
Here’s how to calculate my emergency fund…
- List all your non-negotiable monthly expenses, including , electricity, food and groceries expenses, home loan, internet bill, insurance premiums, loan repayments, school fees, transportation expenses, and water bill.
- This total should be multiplied by 3x or 6x in increments, as you reach your goal.
- Further, if you are on unstable income, the expenses total should be multiplied by 6x to 12x, as you reach each goal.
- It is advisable to take stock of your every few months to keep a track of how much you are spending and if the fund total meets calculations.
For example, if your monthly spend is ₹25,000 for six months that works out to ₹1.5 lakh as emergency fund. This can be built in stages, starting from ₹500-1,000 each month, or even a little more or less depending on your ability. However, the key is to consistent and habitual.
Where should I invest to build my emergency fund?
Your should be separated from the accounts you use for daily expenses. There should be a minor barrier so that it’s not too easy to reach for daily use; but liquid enough to access when required.
Clear Tax suggests options that make optimal returns while remaining accessible and safe. For this, it suggests the fund being split across two types of investments, as follows:
- Immediate Access: This should comprise between 30-40% of your emergency fund and be kept in immediate outreach options such as or bank fixed deposits (FDs).
- Short-Term Buffer: This should comprise between 60-70% of your emergency fund and be invested in low-risk debt options like liquid or overnight for better returns without sacrificing safety, it advised.
Emergency fund: Factors and options to consider
| Investment Option | Access Time | Risk Level | Returns (Approx.) | Best Use Case |
|---|---|---|---|---|
| Savings Account | Instant | None | 2.5%-4% | For immediate liquidity (1–2 months’ expenses) |
| Sweep-in FD | Within 1 day | Very Low | 5%-6.5% | Slightly better returns than savings |
| Liquid Mutual Funds | T+1 (next day) | Low | 4%-7% | For the bulk of the emergency fund |
| Overnight Funds | T+1 | Near Zero | 3%-5% | For ultra-conservative investors |
| Auto-Sweep Account | Instant (partial) | Very Low | 4%-6% | For salaried individuals who want automation |
| Source: Clear Tax | ||||
Ideally, when it comes to emergency or rainy-day fund, you should stay away from investing in volatile assets such as penny stocks or risky , which can fluctuate significantly in the short term. While they may be high risk-high return options, these are not suitable for emergency purpose.
Disclaimer: This story is for educational purposes only. The views and recommendations made above are those of individual analysts or broking companies, and not of Mint. We advise investors to check with certified experts before making any investment decisions.