For the past few days, I’ve taken a break and have been “consulting” with a few of my friends and family over budgeting. I could do this for a living 😛
The first consulting session I took were basic ones some of which I have already covered in my previous blog posts. If you’re new here, you should refer to these topics:
There are more such informational blogposts you can find under Investments category.
However, one consistent question I kept hearing from them is “Ok Nomadcareers, I get it that we should have an emergency fund but where should we put that money?”
What’s Emergency Fund?
Just to recap, Emergency fund is a liquid corpus that you’ve built as a safety nest. Liquid corpus means that you can easily cash it out. By this definition your money in your savings account is liquid as you can withdraw it from ATM or by visiting your bank. However, if you have a large amount of money invested in a house / apartment it’s non-liquid asset as you can’t decide that you want to cash out and cash out within 24 hours.
How much should be your Emergency Fund?
We have discussed this before on this blog. For some next three months of expenses is enough, while for some next 6 months of expenses is enough. Since I’m paranoid for most parts and a conservative investor, I have an entire year of emergency fund built.
For example, if your monthly expenses including your EMIs is about 30k / month and you’re fine with 3 months of runway, your emergency fund should be 30k*3 = 90k INR.
If you come from a traditional Indian family, you might hear from your parents that Gold is a good emergency fund as you can cash it out quickly. While true for the generation that didn’t have access to ATMs or technological saving instruments, Gold as an investment instrument is no longer safe and neither is it appreciative.
Traditionally, investors pay attention to Gold only when there’s high inflation. Considering that many expect a downturn in stocks pretty soon, Gold will definitely start rolling high. Last year for the first time India saw a decline in demand for the precious metal but China saw a much higher demand.
In case you want to diversify you can invest in Gold, however, I personally have never felt safe “investing” in Gold.
Disclaimer: I do have a few physical investments in Gold coins which I made during the start of my career. My best friend invested some money in Gold. Your knowledge is the combination the five people around you and my best friends and my parents were very pro-Gold. I haven’t sold the coins but I will at some point.
You can decide to park your emergency fund in your savings account. It’s the easiest instrument available. What I don’t like about savings account is the low interest rate. My State Bank of India savings account gives me a meager 4% yearly interest rate. Which means if my hypothetical emergency fund is 1,00,000 INR by the end of the year I’ll have earned interest of just 4,074 INR. Inflation of 7% will eat up my interest and my base.
Bank Fixed Deposits are favorite investment instrument for most Indians. The problem here again is that the inflation rate will eat my interest and my base. I should put up a disclaimer here that I do have some of my emergency fund in FDs. I created these FDs as emergency fund back when I had just started earning. It’s a tiny amount as I wasn’t earning much back then and have decided to not break the FD for tax purpose.
The saving grace for Emergency Funds is Liquid Mutual Funds. For the uninitiated, Liquid Fund is a debt mutual schemes where your fund manager invests in certificate of deposits, treasury bills, commercial papers and term deposits. The best part of liquid funds is that there is no lock in period, that is, there’s no penalty on your investment when you withdraw money.
You can cash in your liquid fund within 24 hours and thanks to technology it’s actually less than that.
What you should keep in mind is SEBI has put a limitation on withdrawal of 50,000 INR or 90% of your fund value per day, whichever is lower. There are still hacks to it — instead of investing all your emergency fund in a single scheme you can break it down into multiple schemes. Most of the AAA rated liquid funds have consistent and similar returns. You can research on these funds on morningstar.in or valueresearchonline.
How is my emergency fund spread?
Naturally, you’d like to understand how’s my emergency fund spread across these instruments. Here’s my breakdown:
Gold – 5%
Savings Account – 10%
Fixed Deposit – 5%
Liquid Funds – 80%
Once you’ve decided that x amount should be your emergency fund, consistently start putting money into liquid funds of your choice once funds in your savings account go above a certain amount that you’re comfortable with.