There are very few times in life that gave the sense of pride and satisfaction as our first ever paycheque. At that moment, it feels like everything is possible. We can achieve all our dreams. We are finally independent.
While surely many of us already have a list in place for what to do with our first salary, remember what Spiderman told us all. With great freedom, comes great responsibility. Many of us
To ensure you have a headstart Hence, my first financial goal for 2019 was to build a ‘rainy day fund’ aka an ‘emergency fund’.
Why exactly did I feel the need for it?
Of course, I could lean on my friends, family or credit card/s in tough times for financial support. But, this fund signified much more. It was a way of taking charge of my finances for my family and myself – not only could I lean on me, so could my family. This fund was also my security blanket, should a similar unforeseen situation come again in the future.
What exactly is this emergency fund?
This fund is readily available (liquid) money when a crisis strikes. This fund could be defined as the ‘backbone of any financial plan because it gives us the flexibility and freedom to confidently plan for our long-term and short-term goals.
When would this fund kick in?
- In case of medical emergencies – my own, my daughter’s, or my family
- In case of losing a job or my regular cashflow gets disrupted suddenly
- Unexpected time off from work due to a family situation like caring for my child or parents
- Unexpected major home repairs or loss of assets
What it is not?
This fund is not linked to a pre-planned goal like a car, a house, a fancy new gadget, or my daughter’s education.
How big should this fund be?
While financial planners worldwide suggest having 3 to 6 months of expenses parked aside for emergencies, the amount varies based on our situation and our preferences.
The idea of this fund is to bring peace of mind and buy us some time to tide over a difficult time without distress. For example, this fund would come in handy if one was to lose their full-time job, till they figure out the next step.
How did I decide the number of emergency funds?
I simply tabulated my monthly expenses into 2 parts :
- Fixed expenses (rent, utility bills, basic groceries, house staff salaries, child’s education and classes, monthly SIP) and
- Variable expenses (recreational activities like movies, dining out, gifting, shopping, indulgences)
Taking 100% of my fixed monthly expenses, and 20% of my variable expenses, helped me get a monthly expense figure – these were expenses that I would not compromise on, even if my cash flow stopped from tomorrow. Thereafter, I chose to save 4 months of the above amount.
I must admit it was not a small amount. But being determined, I put all extravagance on hold, became hawk-eyed on my expenses, and slowly the savings started building. Within 4 months, I was sitting pretty on a handsome cushion of cash.
Where to park the emergency funds?
To keep it easily trackable, I started putting the emergency fund into a different savings account. As the fund became robust, I decided to look for options to invest in this fund. What I wanted was a product, which was quick to redeem, at no penalty, with better returns than my savings bank account.
Below is a simple comparison of the savings bank account versus bank Fixed Deposit versus Liquid funds helped me make the decision:
| Product | Return per lakh investment for 1 yr (Pre-Tax) | Exit penalty on short term | Availability of Funds | Taxability |
| Savings Bank Account | 4000 | Nil | Immediate | As per Income Slab |
| Bank Fixed Deposit (Kotak as per latest rates) | 6300 | 0.5% of interest | Instant Transfer | As per Income Tax Slab |
| Franklin India Ultra Short Bond Fund (Ultra Short Term Fund) | 9600 | Nil | Within 1-2 working | After 3 years, capital gains taxation as per 20% (indexation); less than that, as per income tax slab |
| Aditya Birla SunLife Life Savings Fund (Ultra Short Term Fund) | 8570 | Nil | Within 1-2 working | After 3 years, capital gains taxation as per 20% (indexation); less than that, as per income tax slab |
Given the above, I decided to bifurcate my emergency fund as follows to maximize return and ensure availability:
| Product | Split of my Emergency Fund |
| Savings Bank Account | 20% |
| Bank Fixed Deposit (Kotak as per latest rates) | 30% |
| Franklin India Ultra Short Bond Fund | 25% |
| Aditya Birla SunLife Life Savings Fund | 25% |
Next Steps?
After putting the basics in place, I have decided to review this fund at the beginning of every year. The only exception would be if there is an unexpected spike in my fixed expenses or withdrawal of any amount from the fund.
Knowing I have a safety net has also given me a better risk appetite in investing for my long-term goals.
A lesson learned the hard way, but sure to be passed on to my daughter.