Emergency funds

Money Maths

18 Jun 202401:37

Summary

TLDRThe 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.

Outlines

00:00

💰 Emergency Fund Essentials

The paragraph discusses the importance of having an emergency fund that can cover at least six months of expenses, as per the rule of thumb. It emphasizes that this fund should be readily available to cover unexpected situations. The speaker also mentions that if one's income is credit-based and it stops, the emergency fund should be sufficient to sustain for six months. The paragraph suggests two ways to keep this fund: in a savings account with a sweep-in facility to earn interest or in a high-duration fixed deposit that is easily accessible. Additionally, for those who use credit cards, short-term mutual funds or low-duration type funds are suggested as a place to park the emergency fund, noting that these funds offer flexibility and slightly higher returns but may take one to two days to access the money.

Mindmap

Keywords

💡Emergency Fund

An emergency fund is a reserve of cash set aside to cover unexpected expenses or financial emergencies without incurring debt. In the video's context, it emphasizes the importance of having an emergency fund that can cover at least six months of expenses, ensuring financial stability in case of job loss or unforeseen events. The script suggests that everyone should have this fund, highlighting its relevance to the main theme of financial planning and security.

💡Expenses

Expenses refer to the costs incurred by an individual or a household. In the script, various types of expenses are mentioned, such as school fees for children, grocery bills, petrol bills, utility bills, and EMI payments. These examples illustrate the wide range of expenses that one should consider when calculating the size of their emergency fund, emphasizing the need for a comprehensive financial plan.

💡Savings Account

A savings account is a type of bank account that allows depositors to retain their money, earn interest, and withdraw funds without penalty. The video script suggests keeping the emergency fund in a savings account with a sweep-in facility to ensure that the money earns a reasonable interest while remaining accessible. This highlights the importance of liquidity and accessibility in emergency fund management.

💡Interest

Interest is the cost of borrowing money or the return on an investment. The script mentions the importance of having an emergency fund in a savings account that provides 'just-right' interest, indicating that the fund should not only be safe but also yield some income. This is crucial for the growth of the emergency fund and its ability to maintain its value over time.

💡EMI (Equated Monthly Installment)

EMI refers to the fixed monthly payment amount payable by a borrower to a lender at a decided interest rate over a certain period. The script includes EMI as part of the expenses that should be covered by the emergency fund, such as car loans or home loans. This underscores the necessity of having a financial cushion to continue making these payments during emergencies.

💡Credit Line

A credit line is a limit set by a financial institution that allows a borrower to borrow up to a certain amount of money. The script mentions the availability of a credit line as a factor to consider when determining the size of the emergency fund. If one has access to a credit line, it may reduce the amount needed in the emergency fund, as it provides an alternative source of funds during emergencies.

💡Liquidity

Liquidity refers to the ability to quickly convert assets into cash without affecting their value. The video script suggests keeping the emergency fund in a form that allows for immediate access, such as a savings account with a sweep-in facility or short-term mutual funds. This ensures that the fund can be readily used in case of an emergency, aligning with the theme of financial preparedness.

💡Mutual Funds

Mutual funds are investment vehicles that pool money from many investors to invest in a diversified portfolio of stocks, bonds, or other assets. The script mentions short-term mutual funds as an alternative place to park the emergency fund, providing flexibility and a slightly higher return than a savings account. This illustrates the balance between safety and growth that is sought in emergency fund management.

💡Return on Investment (ROI)

Return on investment (ROI) is the profit or loss derived from an investment relative to its initial cost. The script implies that while keeping the emergency fund in a savings account or short-term mutual funds, one should consider the ROI to ensure that the fund is not only secure but also growing. This is important for maintaining the purchasing power of the emergency fund over time.

💡Survival Amount

The survival amount refers to the minimum amount of money needed to sustain oneself or a family for a certain period, typically in the case of an emergency. The script discusses the necessity of calculating this amount to determine the size of the emergency fund required to survive for six months without income. This concept is central to the video's message on financial preparedness and self-sufficiency during emergencies.

💡Short-Term Investments

Short-term investments are assets that are expected to be converted into cash or used up within a year. The script suggests considering short-term mutual funds for the emergency fund, which indicates a preference for investments that offer liquidity and are less risky. This aligns with the theme of ensuring quick access to funds in times of need while minimizing potential losses.

Highlights

Everyone should have an emergency fund for at least 6 months of expenses.

The emergency fund should be in an accessible form.

Children's school fees are part of your monthly expenses.

Include groceries, petrol bills, and utility bills in your monthly expenses.

EMIs for car loans or home loans are considered part of your expenses.

The emergency fund should sustain you for 6 months without credit income.

Keep your emergency fund in a savings account or fixed deposit.

Enable sweep-in facility in savings accounts for better interest.

Choose a fixed deposit term that allows penalty-free withdrawal.

Consider short-term mutual funds or low-duration funds for emergency funds.

Short-term mutual funds offer flexibility and higher returns.

Mutual funds may take 1-2 days to withdraw funds.

Short-term mutual funds may not be ideal for high-severity emergencies without a credit line.

Assess your income and expenses to determine the emergency fund amount.