Do you know that since 2022, more than 37,000 employees have been laid off in Indian startups? And considering the rise in Artificial Intelligence, many routine jobs are likely to be automated. That’s why it is very important to how to build an emergency fund that can provide a financial cushion during the rainy days.
Surprisingly, I came across an article that mentioned 75% of Indians don’t have an emergency fund and are likely to default on EMI payments in case of sudden layoffs.
The Importance of How to Build an Emergency Fund
Clearly, despite all the awareness today, emergency funds are not the top priority of Indians. Every person that starts earning money wants to focus on investing that money in assets that can generate high returns. That’s why the majority of people end up investing money in the stock market or equity mutual funds.
Why Equity Investments Are Not Ideal for How to Build an Emergency Fund
While it is a great asset class to achieve medium to long-term financial goals and create wealth, the question is, can you really invest your equity market for emergency purposes? The answer is no, simply because the equity market is volatile in the short term.
How to Build an Emergency Fund
But when that happens, your equity market returns can get stagnant or can even fall. For example, during the October 21 till June 22 phase, Nifty tanked 16%. During the same phase, the small-cap index was down 20%.
The Necessity of Stability in How to Build an Emergency Fund
So money invested during this phase generated negative returns. Hence, to how to build an emergency fund, you need to invest your money in an asset class that is not volatile and can be easily accessed at the time of emergency.
Yes, the returns might not be very high, but it gives you peace of mind, which in my opinion is priceless. Knowing that you always have a financial cushion at the time of emergency and you don’t have to ask for money from anyone is one of the most satisfying parts of financial planning.
The Importance of an Emergency Fund in Financial Planning
How to build an emergency fund is one of the most important aspects of financial planning, simply because life is uncertain, and we can come across any unexpected expenses.
Now, if you are a salaried person working in a metro city, chances are high that you would already be living hand to mouth.
As soon as you would get your salary, you would end up paying the rent and the EMIs, and after your monthly expenses, you would hardly be left with some money to invest.
The Harsh Reality of Job Insecurity and How to Build an Emergency Fund
Now imagine this: Your job becomes redundant and you get fired.
How would you pay your home rent or EMI? I know we don’t like to imagine such things, but the fact is that today in the private sector, there is no job security.
Hence, it’s very important to have a corpus that can be used in case of emergency.
The Right Approach to Handling Emergencies: How to Build an Emergency Fund
That should be only for your emergency purpose, not for routine expenses.
The reason why I am focusing on keeping your emergency fund and investments separate is because in a survey, when Indians were asked how they would pay the EMI if they ran out of money, 57% said that they would pay EMI by selling off their investments, while 24% said by taking another loan, 5% said they would borrow money from friends and family, and 15% said they would skip the EMI. In my opinion, neither of these approaches is correct.
Personal Strategy for How to Build an Emergency Fund
You should never break your investment on a medium to long term goal. And the only way is to have a separate emergency fund in case of immediate need of money. So when I started working, the first thing I did was split the money into two parts.
Half I invested in how to building an emergency fund and half I invested for my medium to long-term goals, mainly for wealth creation. So in today’s article, I want to address how to how to build an emergency fund and how much to invest in an emergency fund.
I would also focus on some important points that you must keep in mind while how to building an emergency fund.
Key Features of How to Build an Emergency Fund
Let’s get started. The most important feature of how to build an emergency fund is liquidity.
You should be able to access your money the moment you need it.
Best Options for How to Build an Emergency Fund
Saving Account
The easiest option is to save your funds in a savings account because you can immediately access your funds whenever you need it.
Fixed Deposits for How to Build an Emergency Fund
The inflation rate in India is 5-6%. Hence, you need to ensure that you should at least get a return at par with the inflation rate.
And of course, it should also have high liquidity. That’s where the second option, which is also my preferred option, is fixed deposits.
I like fixed deposits for building an emergency fund for three reasons.
Benefits of Fixed Deposits for How to Build an Emergency Fund
Guaranteed Returns: You know that your returns are guaranteed in FD and that gives you a peaceful sleep. In fact, your money up to 5 lakh rupees is insured under DICGC.
Inflation-Beating Returns: FD provides inflation-beating returns.
You can fetch a decent return in FD that is at par with the inflation rate, or some FDs are even better than inflation where you can fetch as high as 9% kind of returns.
High Liquidity: Although FDs have a fixed tenure, you can always break your FD at the time of emergency and access the money.
Yes, there will be a small premature withdrawal penalty, but the returns are still better even after deducting that withdrawal fee.
In fact, there are some FDs where there are no premature withdrawal charges. So what I do is I keep some 10-15% of my money in a savings account to make sure I have money on the same day and the remaining 85-90% in the emergency fund because via the emergency fund, I’ll receive money in one to two business days.
The Role of StableMoney in How to Build an Emergency Fund
Now, if you want to open an FD with a bank, you have to approach them individually. Plus it’s a very time consuming process with all the paperwork and so on.
So I was looking for a platform that can provide a one-stop solution for my emergency fund needs.
That’s where I stumbled upon a platform called StableMoney that helps in how to building an emergency fund by seamlessly investing in high-return-generating FD with a few clicks and you can easily withdraw the money at the time of emergency.
In fact, they also help in identifying the right emergency fund you should have based on your age, demography, and lifestyle.
How to Use StableMoney App to Build an Emergency Fund
So when you open the app, you can see various FD options. Please note that FDs of all banks on StableMoney are insured by DICGC up to Rs 5 lakh.
For example, Suryodha Small Finance Bank offers an interest rate of 9.1% which is insured up to Rs 5 lakh.
Then you have Utkarsh offering up to a 9.1% interest rate. Now when you click on your profile, there is an emergency fund tab. Just click on that and it will show you how much emergency fund you need.
When you click, it asks four questions. Which city do you live in? Are you single or married? How much do you spend monthly? And do you have health and life insurance? And there you go. It has calculated an emergency fund for your needs.
When you proceed further, it would ask how much you want to invest for an emergency fund.
This is just for a reminder. And then you can proceed to invest your money with StableMoney.
On this app, you can also find and compare more than 200 banks’ FDs and invest in 6 banks and NBFCs. You can even filter it with public, private, then small finance, NBFC, or you can even sort it by popularity or interest rate.
Utkarsh Small Finance has the highest up to 9.1% interest for two years.
Then Suryodha is also offering 9.1% for two years. Then Sriram has a 9.07% rate for four years. When you click on FD, you can see whether that FD is insured by DICGC or not.
You can also see the interest rate breakup between general and senior citizens. So in my opinion, StableMoney is providing a great platform to not just identify the best FD rates, but also keep and manage all your FDs on a single platform.
There are also FDs where there are no premature withdrawal charges.
For example, if you have made an FD with Utkarsh Small Finance Bank, there is no penalty for premature withdrawal. Then the third option to how to build an emergency fund is Debt Mutual Fund.
Exploring Debt Mutual Funds for How to Build an Emergency Fund
There are more than 10 different types of subcategories like overnight fund, liquid fund, ultra-short duration, short duration, medium duration, long duration, corporate bond, PSU and banking fund, money market, gilt fund, and the list goes on.
And each Debt Mutual Fund category has multiple Debt Mutual Fund offerings from various fund houses. Now each category has a different risk versus reward offering and you can’t blindly opt for any Debt Mutual Fund for building an emergency fund.
Here the important parameters you need to understand before you opt for Debt Mutual Fund include your duration and credit profile.
These two parameters would decide your return and risk, that is volatility from Debt Mutual Fund. For instance, a low-duration fund will offer low volatility, but it would also offer a lower return.
For example, liquid funds would offer you very low volatility and currently the returns are in the range of around 7%. Vice versa, a long-duration Debt Fund can offer higher returns but comes at higher risk. For example, gilt mutual funds can offer returns in the range of 8 to 9%, but they are very volatile.
It means in the short term that they can even fetch negative returns.
Evaluating Debt Mutual Fund Portfolios for How to Build an Emergency Fund
That’s why the liquid fund is one of the preferred categories to build an emergency fund.
The second important parameter is to look at the Debt Mutual Fund portfolio and understand the credit rating of bonds in that mutual fund.
Ideally, you want to invest in Debt Mutual Funds that have top-rated bonds in their portfolio.
Bharat Bond ETF as an Option for How to Build an Emergency Fund
Then the fourth option to build an emergency fund is Bharat Bond ETF. It’s a Debt Mutual Fund, but you can buy or sell it like a stock from your broker platform. That’s why it’s a bond ETF.
The best part of Bharat Bond ETF is that it only invests in debt instruments of AAA-rated public sector companies and hence has a low-risk profile. The expense ratio for Bharat Bond ETF is almost negligible, and returns are in the range of 7%.
So in this article, we discussed how to build an emergency fund and key points to keep in mind.
Conclusion
Friends how to, building an emergency fund is one of the most important aspects of our financial planning and I have seen people ending up borrowing money from friends or taking personal loans in case of emergency just because they did not have an emergency fund.
The make sure that you build it before it’s too late. Then we discussed the options to how to build an emergency fund.
It includes Saving Account, Fixed Deposit, Debt Mutual Fund, and Bharat Bond ETF. If we compare them on various parameters, on liquidity, all four options have good liquidity.
Although the Saving Account has the highest liquidity with immediate access to money.
Comparing Emergency Fund Options
On volatility, Saving and FD don’t have volatility. They offer guaranteed returns. Debt Mutual Fund and Bharat Bond ETF returns are not fixed.
In return, the Saving Account can’t beat inflation whereas the other three options can beat the inflation rate.
On complexity of investment, it’s very easy to invest in Saving Account and FD. However, Debt Mutual Funds and Bharat Bonds are slightly complicated where you need to understand the duration of the fund, credit rating of the bond within the fund, and so on.
On safety of money, Saving Account and FD are insured under DICGC up to 5 lakh rupees whereas Debt Mutual Fund and Bharat Bond are not insured. Comparing all five parameters, FD looks like the most promising option.
To invest in FD, we looked at the StableMoney platform that genuinely provides a great platform to find and compare more than 200 FDs in India and invest in 6 banks and NBFCs on a single platform with just a few clicks.
This platform also helps you calculate the emergency fund as per your need and then you can invest in the right FDs as per your emergency fund requirement.