How do I create an emergency fund and where can I keep it?

Please also elaborate on the nature of emergency funds.

-Karan H. Jainy

An emergency or contingency fund is an integral part of your overall finances. The purpose of an emergency fund is to provide a strong cushion for your finances in the event of a crisis.

It helps you deal with any financial emergencies without disrupting your investments, which are primarily earmarked for your long term needs.

Every family should have an emergency fund based on monthly essential expenses.

Despite being insured, such a fund is extremely useful in case of any health-related contingencies.

The way to build your emergency corpus is to evaluate your monthly essential expenses such as household expenses, children’s education fees, Equated Monthly Installments (EMIs) and insurance premium payments.

Usually, six to nine months of these mandatory expenses can be kept in a fixed deposit of a large and established bank or in a liquid or ultra-short duration fund.

The number of months of expenses to be saved depends on how secure your job or business is.

However, there should always be a provision for at least six months’ expenses. Once you have worked out the total emergency fund required, you can start building it by depositing money directly from the bank account if you have it or you can start a separate fixed amount in your bank account every month Or you can park it in a liquid fund. until the balance in that account or folio reaches your planned emergency fund.

Always prioritize safety over returns by parking the safety of your emergency funds in a liquid or ultra-short term fund with a large and established bank’s fixed deposits and a high quality portfolio.

Harshad Chetanwala is the co-founder of MyWealthGrowth.com.