3 Occasions When You Need To Increase Your Emergency Fund

  Author: Jai Prakash

Emergencies don’t come with warnings. They can come any time and can financially ruin your family. That’s why you need to have a contingency or reserve fund. Typically, you need to have 3-6 months equivalent of family’s expenses in easily accessible investments such as bank savings account, bank savings-cum-fixed deposits, liquid funds and short-term fixed deposits. While it takes time for anyone to create an emergency fund, it is important to realise that the emergency fund requirements may change over time. Here are some typical situations where you need to make provisions for a larger sized emergency fund.

Prospect of medical emergency Ideally, you should have health insurance plans, critical illness plans and accident insurance to secure your family. However, not every emergency is covered by these insurance plans. For instance, this would be true in case of many dental procedures or emergencies. Also, if you have family members who have chronic health problems, especially aged family members, you will need to have a financial cushion so that emergencies doesn’t disturb your finances through premature exit of investments.

In case you are on the way to become a senior citizen or are already one, you might want to consider an emergency fund equivalent to 9-12 months of expenses. For the amount of money whose use is imminent, you can park that money in a bank savings account. The remaining portion can be stashed away in a higher paying and more tax-efficient liquid fund.

Fickle job security and irregular income It is not uncommon to go through situations, especially during economic downturns, where you are scared of a sudden job loss. As in the case of a family that needs to be stay prepared of major medical emergencies, here too, you need to raise the amount of emergency fund. Since, you know most of your expenses, you can keep a certain amount in a bank savings account and the remaining amount of the emergency fund can be parked in a liquid fund.

The same approach should be adopted by someone with irregular income such as people who get compensated for achieving sales targets. This sum of money for an emergency fund can be raised through a systematic investment plan (SIP) of a liquid fund.

When you become an entrepreneur This case is not very different from the case of a sudden job loss where your emergency fund needs to cover all your expenses. The only difference is that here, you will plan your exit from employment. As a thumb rule, you need to have an emergency fund that covers about one year of expense. Ensure that important expenses like that of life insurance and other premium are provided for.

To sum up, emergency fund needs to change with time. One needs to periodically review one’s emergency requirements and accordingly have an adequate-sized emergency fund.