How Much Should I Put In My Emergency Fund?

Before answering how much one should put in emergency fund we should know what is exactly an emergency fund and why we need it in the first step only. As we know life is never going the way we plan. It’s always like a roller coaster ride and we always face unexpected events in between this.

What is emergency fund?

To answer this question I will tell you once incident happened in my life. Me and my wife both are fit and healthy. We are having normal routines like work, exercise, sleep nothing special. one fine day suddenly my feet slept in our bathroom and I fell down. My hand got fractured and my wife needs to take me to hospital immediately because the pain was unbearable at that time. When we reached there doctor suggested an x-ray and started treatment.

This whole procedure cost me around 20 to 30k and out of that some amount my wife needs to pay upfront. As we have some money in the account so my wife managed it easily but let’s assume if we are living paycheck to paycheck then what happens at that moment. My wife may need to call a couple of friends and relatives and ask for money. But is it a good option and how do you feel at that moment if someone says no? That is the main reason to avoid such a situation we need emergency funds. We should always have some money for such emergency. Which is called an emergency fund.

How to calculate emergency fund?

Now that we understood why we need emergency fund next question that comes to mind how much amount one should save for emergency funds. So to answer this we have one thumb rule. which is nothing but we should have at least six months of expense as emergency fund. But to get this figure first we need to calculate the monthly expense. 
let’s take one example of Rahul(random name) who has an annual income of 8 LPA. So his monthly salary comes out to be around 60k. I am not considering tax deduction here just for simplicity of calculation.

Now in his 60K salary first he should know where he is spending. Let’s assume below are his monthly expenses

1. Rent  = 15k
2. EMIs (Vehicle loan, Education loan, etc.)= 10k
3. Insurance premiums = 5k
4. Electricity, gas bill, water bill, property tax = 3k
5. Petrol/diesel expenses = 5k
6. Groceries, milk, and other essentials = 5k
7. Phone & Internet bill, wifi etc. = 1k
8. Cloths = 3k
9. Eating out = 3k
10. Entertainment = 3k

I have just taken generic expenses it may vary based on individual situations. But out of the above expenses one should know which are there want or must-have expenses. for Rahul Eating out, and movies are not must-have expenses. So basically he can live without these expenses so we should not consider such expenses in our emergency fund. So we will skip point 9 and 10. So our total sum comes around 47k. So Rahul needs to save an emergency fund of around 2,82,000 Rs.

But again this is a general thumb rule and it may vary based on individual situations. let’s assume someone doing his own business for which he might not have a fixed income in each month. For some months he might have a good profit or for some months there will be a loss. For him, we should have at least one year of expense as emergency fund. Because we never know what will happen in business as its depend on market and lots of other factors. As we already faced COVID like situation where lots of food businesses are not able to sustain themselves. If he doesn’t have that much cushion and any emergency comes it will be really difficult to handle such a situation for his family.

Whatever I have explained is bear minimum amount or basic requirement for an emergency fund. If anyone wants to go further then we should also consider other emergencies like let’s say we have a lot of electronic gadget nowadays. If any sudden breakdown of any gadget happens then we should also prepare for that also. For such a case we can consider the highest cost electronics gadget which we have and we should save that amount. Apart from that nowadays medical expenses are skyrocketing. Even though we have medical insurance but most of the time it will not cover nonmedical expenses like Needles, syringes & sterilized injections. So we need to pay some amount one should also prepare for this expense also.

Where we can save emergency fund?

Now we understood how to calculate an emergency fund but where we can save this fund/money. The main purpose of an emergency fund is that to serve emergencies so we should not expect much return on this money and it should be easy to liquidate. I saw some people who tend to treat stock/long term mutual fund investments as emergencies fund. But ideally it’s wrong as stock and mutual funds not that liquid because it takes one to two days to credit in your account. As per my viewpoint, we should save emergency fund in saving account and in a liquid fund. We should have a sufficient amount in the saving account and the rest money we can save in the liquid fund so that in case of urgency we can easily take money out of the saving account meanwhile if we need more we can redeem the liquid mutual fund.

In last I will say we will never know what’s going to happen next in our life but we should at least try to prepare up to some extend so that it will make our life easy. 🙂

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