Emergency funds

Summary

The script discusses the importance of maintaining an emergency fund equivalent to 6 months of expenses to ensure financial stability in case of unforeseen circumstances. It suggests keeping this fund in a savings account with sweep-in facility or in a liquid mutual fund for easy access and better interest. For those using credit cards, short-term debt mutual funds or low-duration funds are recommended as alternatives. The focus is on having a fund that can be accessed quickly within 1-2 days, emphasizing the need for a safety net without relying solely on credit.

Takeaways

• 💰 Everyone should have an emergency fund equivalent to at least 6 months of expenses.
• 🏦 It is recommended to keep this emergency fund in a savings account with a sweep-in facility to ensure a steady interest.
• 🔄 If the savings account is used for the emergency fund, ensure it has the ability to transfer funds quickly in case of need.
• 📈 Another option is to invest the emergency fund in a 3-month notice or short-term deposit type of fund for better returns.
• 🚗 Monthly expenses can include school fees for children, grocery bills, petrol bills, utility bills, and EMI payments for vehicles or homes.
• 💡 The emergency fund should be enough to cover all these expenses for 6 months without relying on credit.
• 💳 For those who use credit cards, short-term mutual funds or low-duration funds can be an alternative to park the emergency fund.
• 📉 The downside of investing in mutual funds for an emergency fund is the time it takes to liquidate, which can be 1-2 days.
• 👉 If an unexpected emergency arises and there is no available credit line, the mutual fund might not be the best option for immediate needs.
• 📋 It's important to assess whether your current income can sustain you for 6 months without credit in case of a financial crisis.
• 🌐 The video script suggests considering various forms of investments for the emergency fund, depending on individual financial habits and needs.

Q & A

How much emergency fund should one have?

As a rule, it is said that everyone should have an emergency fund equivalent to 6 months of their expenses.

What constitutes your 6 months of expenses?

Your 6 months of expenses should include your monthly expenses such as grocery bills, petrol bills, utility bills, school fees for your children if you have any, and any ongoing EMIs like car or home loans.

Why is it important to have an emergency fund?

An emergency fund is crucial to ensure you can survive for 6 months if your income stops being credited, covering all your necessary expenses.

In what forms can you keep your emergency fund?

You can keep your emergency fund in a savings account with a sweep-in facility to earn interest or in fixed deposits (FDs) that can be cashed at any time.

What is a sweep-in facility in a savings account?

A sweep-in facility in a savings account allows you to earn decent interest by automatically transferring excess funds into a fixed deposit while keeping the money accessible.

What is an alternative way to keep an emergency fund for credit card users?

Credit card users can keep their emergency fund in short-term debt mutual funds or low-duration funds to get a slightly higher return on the capital invested.

What is a downside of keeping an emergency fund in debt mutual funds?

The downside is that withdrawing money from debt mutual funds can take one to two days, which may not be ideal in a severe emergency if you don't have a credit line available.

What should be included in the calculation of your monthly expenses?

Monthly expenses should include your grocery bills, petrol bills, utility bills, school fees for your children, and any ongoing EMIs like car or home loans.

What is the benefit of keeping an emergency fund in a fixed deposit (FD)?

Keeping an emergency fund in a fixed deposit allows you to earn interest on the money while ensuring it can be cashed at any time.

What should you consider if you don't have a credit line available during an emergency?

If you don't have a credit line available, it might not be a good option to keep your emergency fund in debt mutual funds due to the withdrawal time.