An emergency fund is money set aside only for real emergencies: losing your job, a medical bill insurance does not cover, or an urgent repair. Its job is to stop you from borrowing on a credit card or breaking a long-term investment at the worst moment.
How much is enough#
A common guideline is three to six months of essential expenses. Essential means rent or home loan EMI, groceries, utilities, insurance premiums, school fees and other EMIs. It does not include holidays or shopping.
- Lean towards six months or more if your income is irregular, you are the only earner, or you support parents.
- Three months can be enough with two stable incomes and good health cover.
Where to keep it#
The money must be safe and available within a day or two. Returns come last. Many people split it between a savings account for the first month's needs and a sweep-in or short fixed deposit for the rest.
How to build it#
- Add up one month of essential expenses from your last three months of statements.
- Multiply by the number of months you are aiming for.
- Set up a fixed monthly transfer on salary day until you reach the target.
- Refill it after you use it, before restarting other goals.