What is your Emergency Fund Carrier?

        Moving ahead with our Introductory Series, this post constitutes 3rd important component of our DIY Financial Planning (FP). With Term and Health Insurance in place, you can consider having come halfway​ through your financial planning journey. 

        No Financial Planning (FP) is complete without a provision for a rainy day fund. It’s called an Emergency Fund and that’s what I am going to talk about in this post. It’s a fund maintained to meet demands arising out of unexpected situations. 

         We all keep some cash and change in our pocket all the time, right?. That’s because we don’t know for sure, when we go outside, exactly how much money we are actually going to need. In our day to day life, we use so many small but important things that we need to buy them the moment they get damaged or broken. You make a list of things to purchase when you go outside, and when you get back home, you are like “oh shit, I completely forgot the batteries for TV remote!”. Often such things will be small, costing you 10-50 rupees, and the ones you might not use your credit or debit card to pay for. For this reason, we always keep some extra cash in pocket. Ofcourse, your bank account may be showing five-six figures but we are talking about the availability of money at the time and in the form it is required.

        An Emergency Fund (EF) is almost similar to that except that it is on a slightly bigger scale and a serious note. Like above, it is for sudden requirement of funds in our routine life. For an instance, an irreparable refrigerator mandates that you buy another one. Sudden breakdown of a car, a damaged TV or AC, blockage of water lines due​ to clogging and many other similar situations will require you to shell out funds from your planned reserves. Such situations, if not planned for, can disrupt you budget for next several months. Then there are dastardly ones like loss of job, etc where you will have to arrange for your family’s monthly expenses till​ the time you get yourself another job.

        These are emergencies which we normally do not anticipate. But we need to plan for them none the less. That’s why there is a concept of Emergency Fund (EF), where in you put aside a certain amount of money for those rainy days. Again, how much is that certain amount? Well, just like every damn thing on this planet, there is an expert opinion on this one too. Your EF should be equal to approximately​ 6 times your monthly expenses.    Actually that depends on many things. An individual’s monthly expenses as well as loan installments and the security of his job, they all affect the amount required to be kept as an EF. But mostly it would amount to approximately six times your monthly expenses. So, we will stick to that. 

        Now, a different kind of question. where do you keep you EF? Of course, not in the drawer in your closet, or bedsheets, or still archaic, in clay pots. What I mean is, in what form (We will call them EF carriers, as they carry your Emergency Fund) do you keep your​ EF?. There are a few options. But most people would not be bothered​ about that because they have been told, or they may have read somewhere that the purpose of an Emergency Fund is not to earn any interest or return on your kept money. It should be in a form which is most secure, reliable and easily accessible. For that reason, they think, what better than a savings bank account, right?. What if I told you that it is not downright right. Though, it’s easily accessible and secure as compared to stock and mutual fund options, there is a little point of ‘keep in mind’ too. In india, there’s an entity called DICGC to which almost all banks pay a certain amount of premium. The DICGC in turn, provides insurance cover for all deposits in bank except government deposits. But the cover is limited to Rs. 1 Lac per depositor only. So if you have Rs. 3 Lac (as your EF) lying in a bank account, you would only get Rs. 1 Lac, in case the bank goes down the drain.

        And I don’t buy the argument regarding EF’s *not for profit* kind of purpose. That’s to say if your EF is already there playing it’s part, then it would do no harm to expect a little more from it. It may be less on the side of return but if reinvested​, it actually can grow your EF, which will contribute in enhancing your EF in future, matching with your expenses at that time and you will end up having to fill up your EF pot less on your part proportionally​. 

        But remember, this can not be at the cost of timely accessibility of your fund. Therefore, a careful and a balancing choice will do good in creating your EF. 

        Therefore I am going to list out a few EF carriers as below.

Traditional SBA

        I guess you all know what a savings bank account (SBA) is, so we are not gonna discuss it in much detail. You get around 3-3.5 percent interest on your money lying in this kind of accounts. Quick availability and safety of your funds, online transactions and debit/shopping cards make it an easy choice for anyone’s EF.

Bank Fixed Deposit

        The other option is a bank fixed deposit (FD). It is as secure as SBA and the plus point is that you get slightly better interest rate. Also here, the term fixed doesn’t mean that you can’t withdraw it before it’s maturity. Though you will get discounted interest if you do that.

         Now, the minus point of a bank FD (for our EF purpose) is that it’s funds are not readily accessible as SBA’s. You will need to go to a bank branch to break the fixed deposit and transfer that amount to your SBA before you can withdraw it. This process takes time as you may not be the only customer of the bank. Now a days, you can make or break FDs online from your SBA balance. That too, may not be very convenient in case of a sudden need of money.

Auto sweep enabled SBA

       Many banks, now a days offers such accounts. You can call them a SBA+FD account. You can operate it like a normal SBA. Their thing is that they have a limit called threshold limit. Anything deposited  beyond that gets converted to an online FD automatically everytime​. So you get higher return on that amount. Now, when you need to withdraw, just do it like you do with your SBA. The FD that was created earlier automatically breaks and gets transferred to SBA. This is a seamless process and doesn’t require any intervention like it does while making FD manually. You can even withdraw from ATM without noticing slightest delay because it’s a fully automatic and seamless conversion process. Therefore you get ease of access too.

Gold

       Some may say, “Did you just say gold?”. I would say why not. It’s also an option to put your EF money. A little bit risky, but given the penchant for it among people (especially us Indians), and increasing cost of mining and processing the *yellow shine* to perfection, will only make it dearer over time. Remember, by the term gold here, I mean gold coins/certificate gold and not ornaments. You lose money on crafting work while selling back ornaments, while certified coins of gold would be acceptable in almost all jewellery stores and you will get actual value of your gold in case you need money. Though, gold is liquid enough to have it encashed within a day, there is a bit of inconvenience of access there. So it may not be prudent to park your entire EF money in here.

Liquid Mutual Funds

        If the term *Mutual Funds* rings a bell of caution to you, just know that Liquid Funds (LFs) are a kind of debt funds that mainly invest in relatively secure avenues like Commercial Papers, Money Market Instruments, Fixed Deposits, Govt Securities etc.  LFs are very short term in nature, often spanning over just a few days. They don’t have entry or exit loads like other mutual fund classes do. And the good thing is that redemption of your money from your LF takes just a single day or even a few hours due to technological advancements. Normally, investors use LFs to temporarily keep their investment fund and use STP (systematic transfer plan) to move to other mutual funds, a certain sum each month. Well, from the security’s point of view, I will put them between SBA and gold and and from the returns’ point of view, we can easily list it above SBA, because they give around 6-7 percent returns easily, which, given their very short term tenures, may even surpass Bank Fixed Deposits.

        So, that is it for EF cariers. Be sure to mention if I had missed out on anything. Up next, I will be writing about yet another important component of our DIY Financial Planning.

        I’ll be right back…

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