Your money: where can you invest your emergency funds?
By Sneha Joshi
We all agree that we need to have savings for emergencies. Life is unpredictable, especially after a pandemic. Some days are not all sunny; therefore, it is crucial to be prepared for the rainy day.
Here are five ways to prepare for any eventuality.
List your monthly expenses
A good habit is to differentiate the expenses according to the need. Inevitable expenses include rent, electricity, tuition, groceries, clothing, while expenses for movies, food, luxury vacations, etc., are discretionary. Prioritizing spending based on need and utility can help reduce unnecessary spending and increase savings.
Determine the emergency fund
A universal rule is to set aside three to six months of living expenses under emergency funds. If your job is permanent and stable, you may opt to set aside three months of expenses as an emergency fund, while if you have a part-time job or a contract or freelance job, you may want to have a larger body of at least six months. monthly expenses.
Anticipated saving of emergency fund
It is important to make sure that your emergency fund is accessible and liquid. However, keeping it in cash or in a savings account isn’t the best option, at least not the entire corpus. Invest systematically to get returns without compromising liquidity and without taking excessive risk.
Investing for short and long term emergencies is essential. A simple way to divide the emergency fund into short-term and long-term emergencies is to estimate the expenses to fund those emergencies. As the investment for short-term emergencies must be very liquid, it is best to invest in a liquid fund.
Regarding liquidity, liquidity allows for instant repayment facility. Up to Rs 50,000 can be instantly credited to your linked bank account.
Besides liquidity, it is important to diversify and spread your emergency fund across different avenues that ensure quick accessibility while enjoying high returns.
For long-term emergencies, one way to invest it is to park a certain amount in a multi-asset fund. These funds allow liquidity with no exit charge after one year of investment and are a comparatively better option compared to a fixed deposit if the investment horizon is longer than three years.
The author is Associate Fund Manager, Alternative Investments, Quantum AMC