How to Save for Emergency Fund & Investing Options in India (2024)

How to Save for Emergency Fund & Investing Options in India (1)

In This Article

  • What is an Emergency Fund?
  • Why Do You Need an Emergency Fund?
  • How Can You Build an Emergency Fund?
  • Where Should You Invest in India for an Emergency Fund?
  • How Much Can You Save in an Emergency Fund?
  • FAQs

Having an emergency fund is important as it can help you in the future. Most people know what an emergency fund is, but there might be some who don’t know it. If you don’t know what an emergency fund is then we are here to enlighten you. An emergency fund is a type of fund that is designed to pull you out and cushion you against life’s unexpected moments.

What is an Emergency Fund?

An emergency fund is a pool of liquid money set aside for unforeseen expenses. It is available for use anytime and anywhere. Having an emergency fund lets you save money for the future. You can save the money and use it at a later date. The amount you invest does not change and there are no gimmicks like withdrawal fees or exit load charges involved.

Why Do You Need an Emergency Fund?

Here are a few reasons why you should set aside a certain amount for youremergency fund per month.

1. To Prepare for Unexpected Events

You never know what life will throw at you the next day, hence it is important that you have an emergency fund. It will bring a level of security in your life. Emergencies can include medical expenses, paying for your child’s higher education more than expected, etc. With an emergency fund, you will be able to save up a lot and bear all these expenses without any worries.

2. To Learn to Save Money

When you get into the habit of investing a certain amount of money whenever you have excess cash, you actually adopt sound financial behaviour. Having an emergency fund will teach you how to be disciplined with money and you will learn to avoid overspending whenever you feel like.

3. For Instant Funds

Emergency funds are immediately available for use – be it short-term or long-term. Cash will be available to you instantly and you won’t have to worry about withdrawal or exit load charges. To make matters better, emergency fund accounts are directly tied to your debit card, RD, and fixed deposit schemes.

4. For Repair-related Work

Let’s say a household appliance is out of warranty and it suddenly breaks down. If it is of extreme importance to you and you simply cannot do without it then you can use your emergency funds to get it repaired. An emergency fund can provide you with money whenever you need it.

How to Save for Emergency Fund & Investing Options in India (2)

How Can You Build an Emergency Fund?

You can build anemergency fund in Indiain the following ways.

1. Start Tracking Your Budget

If you don’t know what you’re spending your money on, you won’t be able to build an emergency fund. Find out where most of your money goes and whether it’s worth it. If it’s not, cut down the unnecessary expenses and start being more disciplined with regards to the money you spend.

2. Start Small But Be Consistent

You don’t need to set aside Rs 10,000 every month to build an emergency fund. You can start small to build up a fortune. You can even set aside Rs 2,000 or less for your emergency fund. The trick to building an emergency fund that works is to invest a small amount but regularly. This means that you should not skip saving even for a month.

3. Make Sure It’s Liquid

Make sure you put your money in a place where it’s easily accessible. You ideally want to make your fund as liquid as possible. You can invest in fixed deposits or recurring deposits of your savings bank. Make sure there are no lock-in periods if you plan on investing in any specific schemes. When you invest money in an emergency fund,make sure that the money will be easily available for you whenever you need it.

How to Save for Emergency Fund & Investing Options in India (3)

4. Opt for Automatic Transfers

You can instruct your bank to automatically transfer any excess money into a fixed deposit every month. This way, you will earn a higher rate of interest as compared tosaving money in an existing savings bank account. Also, make sure you dedicate to saving at least 25% of your money and putting it into your current savings bank account.

5. Cut Down on Unnecessary Expenses

There’s no way you will have a good emergency fund if all you do is just spend whatever you earn. You have to get into the habit of saving money. Spend on important things and avoid spending in excess.

6. Make Sure the Amount Saved is Equal to Your Six-months’ Expenses

Your emergency fund amount should equal up to six months’ of your regular monthly income in total. This is to ensure you’re covered for cases when you are unemployed or don’t have any supplemental income.

Where Should You Invest in India for an Emergency Fund?

Your first option when it comes to going for youremergency fund investment optionsshould be your savings bank account. You should put at least 25% of your money into your savings bank account. The upper withdrawal limit for these accounts is usually Rs 40,000 a day and most of these have a direct chequebook and debit card linked to them. Besides this, liquid mutual funds are another option where you can earn decent returns up to 8.52%. There are many schemes available like ultra short-term funds where the fund company lets you redeem the money directly without having to wait a day to transfer to the bank and withdraw. Besides that, you also have the option to opt for sweep-in accounts where some amount of money gets transferred automatically to your FD at the end of the month when recorded to be in excess.

Short-term debt funds are also another option where you can get higher returns. The important thing to note here is to consider your financial needs for the future when you’re investing. Your emergency fund corpus will be much higher.

How Much Can You Save in an Emergency Fund?

When you are planning to save money for an emergency, try to save up at least 3 to 6 months’ of your monthly income for it. For example, if you earn Rs 50,000 a month, your emergency fund should be worth at least six months’ of your earning which is Rs 3 lacs in this case.

You can further categorize the money you save in your emergency fund into long-term and short-term funds below.

1. Long-term

Long-term emergency funding options can help you in the long run as mentioned. Some long-term emergency mutual fund options let you earn higher interest rates when you stay invested for a longer period of time.

2. Short-term

By investing in short-term emergency funds, you will have money whenever you need. Good examples of short-term funds include FDs, RDs, and any short-term debt funds. Whenever you plan to invest in short term funds, you should check if the money can be withdrawn easily or not. Your savings bank account is the best example of keeping a portion of your emergency fund parked in it when it comes to meeting your short-term financial emergencies.

FAQs

Here are some frequently asked questions and their answers with regards to emergency savings funds.

1. Is an Emergency Fund Similar to Savings?

Emergency funds are not the same as your regular savings. In a savings fund, you invest the amount for longer periods of time. The goal of savings funds is to generate wealth and higher interest rates without redeeming the funds throughout the duration of the investment. In the case of emergency funds, your goal is to make your funds instantly accessible rather than focus on how much money you make by getting theinterest. This is the key differentiator between the two.

2. How and When to Redeem Money From an Emergency Fund?

If you’re investing in any debt mutual funds or similar schemes, check with the fund house to see if they allow instant redemptions. Most of them do and investors get to withdraw up to 90% of the cash they invest in these schemes. You should ideally redeem your emergency fund money either when the time period for staying invested in is up so that you can reinvest the proceeds made or when you face a time of financial crisis or emergencies like medical expenses.

Most people don’t take the effort to save money or set up an emergency fund. But if you have an emergency fund, it will help you in the future. At least, you’ll be stress-free and not worry about where you get your money from when a crisis hits you and that’s the point of it.

Also Read:

Working Tips to Maintain Financial Security
Money Management Apps That Make Financial Planning Easier
Sensible Ways to Save and Enjoy Your New Wealth Responsibly

How to Save for Emergency Fund & Investing Options in India (2024)

FAQs

How can I save my emergency fund in India? ›

A savings account is a logical choice since it offers liquidity that is highly important during a crisis. You can look for a savings account offering a high rate of interest with no minimum balance requirements or heavy fees. However, another important aspect of an Emergency Fund is that you will not need it regularly.

How can I save money and invest in India? ›

Best Investment Plans In India 2022
  1. Public Provident Fund (PPF)
  2. National Savings Certificate (NSC)
  3. Post Office Monthly Income Scheme.
  4. Government Bonds.
  5. National Pension Scheme (NPS)
  6. Sovereign Gold Bonds (SGBs)
  7. Equity Mutual Funds.
  8. Unit-linked Insurance Plans (ULIPs)
Sep 9, 2022

What is the best option to save money in India? ›

Public provident fund (PPF)

As the safest and most popular investment option in India, PPF is a government-backed long-term saving scheme that is tax-free. The amount of money deposited in PPF is available as a deduction under section 80C of the Income Tax Act, and the interest earned on PPF is also not taxable.

How much emergency savings is enough? ›

While the size of your emergency fund will vary depending on your lifestyle, monthly costs, income, and dependents, the rule of thumb is to put away at least three to six months' worth of expenses.

What would I save first in an emergency? ›

These are some of the supplies the Red Cross suggests including in your emergency kit:
  • Flashlight.
  • First aid kit.
  • Battery-powered or hand-crank radio.
  • Batteries.
  • One-week supply of medications and medical supplies.
  • Personal hygiene items.
  • Cash.
  • Multi-purpose tool.

Should I invest or save for emergency fund? ›

Generally, it's not a good idea to invest your emergency fund. Unexpected expenses, of course, are totally unpredictable and when you invest your emergency fund, you run the risk of possibly losing your initial investment if the value of your assets falls below what you purchased them for.

Why is it important to save list three reasons? ›

Saving money is important because it helps cushion the blow of financial emergencies and unexpected expenses. Additionally, saving money can help you pay for large purchases, avoid debt, reduce your financial stress, and provide you with a greater sense of financial freedom.

What are 4 types of investments? ›

There are four main investment types, or asset classes, that you can choose from, each with distinct characteristics, risks and benefits.
  • Growth investments. ...
  • Shares. ...
  • Property. ...
  • Defensive investments. ...
  • Cash. ...
  • Fixed interest.

What is the best way to invest and save money? ›

How to save and invest
  1. Savings Accounts. If you have money in a savings account, you receive interest on the account balance, and you can easily get your money whenever you want it. ...
  2. Insured Bank Money Market Accounts. ...
  3. Certificates of Deposit.

Which saving method is best? ›

Use these money-saving tips to generate ideas about the best ways to save money in your day-to-day life.
  • Pay Yourself First. ...
  • Stop Smoking. ...
  • Take a "Staycation" ...
  • Spend to Save. ...
  • Utility Savings. ...
  • Pack Your Lunch. ...
  • Create an Interest-Bearing Account. ...
  • Annualize Your Spending.

Which saving gives highest return? ›

  • 1) National Savings Certificate. ...
  • 2) Senior Citizen Savings Scheme. ...
  • 3) Recurring Deposits. ...
  • 4) Post Office Monthly Income Scheme (MIS) ...
  • 5) KVP (Kisan Vikas Patra) ...
  • 6) Public Provident Fund (PPF) ...
  • 7) Sukanya Samriddhi Yojana (SSY) ...
  • 8) Atal Pension Yojana.

How can I save 5000 in 12 months? ›

Trying to save $5,000 in one year is near impossible if you wait until the last few of the 52 weeks to actually start saving. If you take advantage of the whole 52 weeks, however, you can do it by just saving $416.67 a month, $192.31 biweekly, $96.16 a week, or $13.70 a day.

Which investment gives highest return in India? ›

Equity Mutual Funds

These are equity based mutual funds that invest only in equity shares. Mutual funds are the most popular high-return investment plan in India. The returns on mutual funds are affected by market fluctuations. This makes them one of the riskiest investment options.

How can I save my 12 month emergency fund? ›

Whatever your reason for wanting to save a year's worth of emergency funding, here's how to get there.
  1. Determine Your Monthly Expenses. ...
  2. Calculate Your Monthly Income. ...
  3. Open a Money Market Account. ...
  4. Set Up Automated Transfers. ...
  5. Cut Back on Unnecessary Expenses. ...
  6. Sell Unused Belongings. ...
  7. Get a Part-Time Job. ...
  8. Use Windfalls Wisely.
Apr 12, 2022

Is Liquid fund better than FD? ›

While securities in a Liquid Fund are subject to daily mark to market, FDs provide returns without volatility." “There is a graded exit load in liquid funds for the first 6 days, which becomes zero from the 7th day onwards. In the case of FDs, there is a penalty for early withdrawal through the term of the deposit.

Where should I park my emergency fund? ›

Therefore, your emergency corpus must be easily and quickly accessible in the form of cash or in the savings bank account. A part of the funds can also be invested in liquid mutual funds that invest only in money market securities and therefore carry low risk. FDs or RDs can also be considered.

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