Creating And Managing An Emergency Fund

Theres multiple theories and practices propogated by the pundits of finance and wealth as to what should be the amount one should have in an "emergency fund".

Formulaes range from a 3 months of buffer to a 6 months of buffer. Some think that this should be calculated by using historical averages with creative variations built in. In effect it leaves one quite confused as to how we should be looking at this no.

As i always say, life is about simplification-- the more simplified is the understanding , the easier it is to manage and execute. So lets go back to basics.

An Emergency fund is the amount of money that one should be able to withdraw immediately in any Emergency situation to tide over the Crisis. There are two key words which will help define the amount of money that you need to keep aside.
1. Crisis
2. Immediately ( whithin 24 hrs)
So you must first define or try to define these as accurately as possible for yourself. One must be honest while answering these questions.

Crisis can mean multiple things--- loss of job, hospitalization, urgent travel, death and related costs, mortgage payments. One needs to understand these requirements and costs of these requirements in ones own context. An example is that if you are covered by medical insurance you may not take those costs into account and if you are not ( get one fast!) then take those costs.
so if we were to make a simple calculation
A= monthly expenses for rent, food, entertainment, transportation, telephones, any open mortgages, electricity-- * basically all the monthly expenditures to run your household
B= Annual/ monthly premiums that need to get paid for insurance coverage, motor insurance, etc ( these usually get missed out)
C= Medical/ travel expenses that may come up ( just do a quick check of the hospitals near you if you dont have medical coverage)
Thus the Emergency fund ( E) will be calculated as
E= 3A+ B+C

Simple enough? if you are still worried you can create a safety factor of 30% on this to calculate the Safe Emergency fund-- (SE)
SE= 1.3X E


While today the availability of credit cards is like a gift from heaven-- but i think at the max the credit card should be used for the 30% safety factor and the basic emergency fund should be in cash or cash equivalents only.
A lot of the older generation Indians-- those who did not believe by the credit card have more than the amount of funds that they need readily available in cash or liquid funds ( in bank or in the house-- remember the tijori?)
The newever generation usually live by the day-- enjoying in the now-- and do not have these funds planned.
This calculation is important for both types of people-- the have mores and the have less. The have mores because they are wasting an opportunity to get higher returns and the Have lesses the high risk that they are living in now.

Well understood is half begun--- So make some good use of the Emergency fund concept..!!
Happy investing..!