An emergency or contingency fund is like a household inverter – it switches on when the main supply fails. Unfortunate circumstances like a job loss, a pay cut or a medical crisis can leave you crippled. In such situations, you might need more funds than what you had budgeted for. A contingency or emergency fund is the resource you look forward to when faced with unexpected expenses. Such a fund needs to be liquid because there is no use if you can’t use your own money when you need it the most. However, parking all your savings in a bank account may not be very smart, because inflation can eat into your savings.
That is why investing it in financial tools is a better route as it will generate attractive returns while keeping your money liquid. However, it is also important to choose the right plan to invest in. Market-linked plans like stocks, bonds, and mutual funds can earn more returns but there’s always the risk of losing your capital. It is crucial to invest as per your goal. If you aim to create a fall-back fund it is advisable to invest in a more sound financial tool like a Fixed Deposit, Senior Citizen Savings Scheme, or Recurring Deposits, just to name a few. This is because not only is your capital safe when you invest in these but you can also earn steady returns that beat inflation.
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Read on to know how to build a contingency fund by making the right investments.
- Set a goal
How large should your contingency fund be? A starting point is three to six months of your monthly income. Assuming you earn Rs.30,000 a month, this would mean Rs.90,000 to Rs.1,80,000. Setting goals is very important because if you don’t have any you would not be able to make the right investment decisions. Generally, financial experts suggest you should have a minimum of 3-6 months of funds that can be used to cover your daily expenses. Once you know how much you would need to grow your corpus you should calculate how much you should start saving and investing to reach that amount. For that, you can start setting aside an amount monthly based on your income, regular expenditures, lifestyle and liquidity requirements.
- Choose an investment option
Once you start saving every month, you can start looking at investment options in the market. There are many options available which can make it a tough task in choosing the right one. Make sure to follow this checklist before choosing an option.
- Check your financial goals
- Analyse your risk appetite
- Check the safety ratings of the investment tool
- Look for tools that provide higher interest rates
- Invest longer for greater returns
- Check the policy on premature withdrawals and their penalties
- Check if you can avail of a loan against your deposit amount in case of emergencies
- Check the mode of investment online/offline (Many tools have rate benefits for investing online)
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- Invest and watch your money grow
There are many instruments that you can invest in online. This makes it easier to invest from anywhere at any time. Also, many tools have rate benefits for investing online. If you do not have a huge corpus to invest directly you can always opt for a monthly savings scheme. These are investment plans where you can make small monthly contributions to grow your money while maintaining adequate liquidity.
Start now! Invest early on in life to make the most of the compounding effect of the investment tools. Secure your financial future by carving out an emergency fund for yourself and your family by investing in the right financial tools.
