The word ‘emergency fund’ gained wide circulation during the Covid-19 pandemic in India which drove millions out of their livelihood and plunged families into financial misery for a prolonged period of time. The term refers to a cash reserve which is specifically kept aside for any sort of unplanned expense or financial emergency. As the name indicates it can be used in any unforeseen situation that can last for a short duration such as medical treatment or for a relatively long time such as a period of unemployment.
Though money from general savings can be used for any contingency situation, nowadays emergency funds are not used in such loose, amorphous meanings. They carry a formal sense and should consist of an amount that can see you through for different tenures.
Emergency fund should never be used for this purpose
First of all, the money in any emergency pool should not be used for regular expenditure and neatly kept aside for hours of crisis. It would function as a safety net to protect you and your family in unforeseen circumstances. Any big expenditure for which one is not prepared can be included in the umbrella term of ‘emergency funds’.
The liquidity dimension of emergency fund
Liquidity refers to the quality of being able to be converted into cash quickly. Therefore, this money has to be stored in a form that can be easily tapped and converted in the form of cash. Therefore, it cannot stay in illiquid forms such as landed assets since it takes considerable time to look for an appropriate buyer of a landed asset, or real estate, before the sale proceeds move into the bank account of the seller.
How much money is considered an emergency fund?
Estimating the quantum of an emergency fund needs careful calculation. All the household expenditure needs to be factored in, including all EMIs, insurance premia, investment obligations such as SIP (systematic investment plans) in mutual funds or recurring deposits, tuition fees of children, utility bills. Most investment strategists think a corpus that can see you through for 6 months is a significantly adequate cushion for most families.
