A Brief Understanding of Emergency Savings Fund

A Brief Understanding Of Emergency Savings Fund

The unwished-for realities of life are challenging for all of us. The problem is, they always hit us at unexpected times. These unforeseen situations may visit us camouflaged as various characters, but their objective is the same; to create unrest within ourselves and our family. The need for an emergency savings fund, also known as a contingency fund, is in a way our shield to fight against life’s surprises.

Challenges, part and parcel of our daily life

We wish not to be bothered by calamities both natural and man-made, but in the back of our minds, the fact that things might go wrong is always peeping from some window or alley. Pessimism is not the way our lives grow, and it is optimistic to plan for possible mishaps. These hurdles are teachers, and at times we can learn from observing our surroundings.

The many faces of challenges:

1. Medical emergency: It is not in our hands to not fall ill. Yes, we wish and prey to be healthy and happy, but the current situation is an eye-opener that even though staying healthy is our job, being prepared for a medical mishap is equally important.

2. Job loss: It might hit any one of us. The way the world is spinning around pandemics and crises, it is not uncommon to get laid off. And if it does, we should be ready to tackle it till the time we prepare ourselves for the next job.

3. Other unwanted expenses: These are real sore throat kind of situations. Hike in school fees, loss of property and renovations, sudden death of the bread earner of the family and others. They will never knock on the door before entering our houses. Better, we should be prepared for them, if and when they arrive.

What is an emergency savings fund?

Emergency savings is kind of a safety net; we take aside some fragments of our income and save that amount in a separate account. The money lying in an emergency savings fund account is not used to buy a new car or to strike out a wish from the bucket list but is purely maintained for unforeseen situations.

How much should be in the emergency corpus?

The money saved aside in an emergency savings account should cover a minimum of three to six months of regular expenses. There are some factors we should consider while building such a corpus.

  • Daily household expenses
  • Monthly income
  • Number of family members
  • Number of dependent members
  • EMIs (if any)
  • Premium for life and health insurance
  • Unforeseen medical expenses

After negotiating all the above-mentioned factors, we should have a figure in front of us. Our next job is to break this figure into sizable and achievable targets and start saving every month.

Where to put our money?

Always consider opening a savings account where the money is safe and will grow. There are some zero balance digital savings accounts available in the market, where you can save money without paying any monthly maintenance charges. They also offer a decent per annum interest rate.

Mutual Funds or Stocks will not be ideal for an emergency savings fund, as they are market dependent and may lose value. A savings account will be the ideal safety net to park your contingency funds.

Another good option to look at is the ActivMoney or Flexi Fixed Deposit plan. ActivMoney is a program where extra money over a specific threshold lying in your savings/current account is transferred to a Fixed Deposit and vice versa.

You can switch the money from the FD account back to your savings account as per requirement. Under such a scheme, you can earn FD interest on the balance lying idle and avail liquidity in your savings account.

Who should open an emergency savings account?

Practically everyone. We should guard ourselves from situations that are not in our hands.

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This Article is for information purposes only. The views expressed in this Article do not necessarily constitute the views of Kotak Mahindra Bank Ltd. (“Bank”) or its employees. Bank makes no warranty of any kind with respect to the completeness or accuracy of the material and articles contained in this Newsletter. The information contained in this Article is sourced from empanelled external experts for the benefit of the customers and it does not constitute legal advice from Kotak. Kotak, its directors, employees, and contributors shall not be responsible or liable for any damage or loss resulting from or arising due to reliance on or use of any information contained herein.