Emergency Fund & Insurance: Your Financial Airbag
Life is unpredictable. Before you start investing for wealth, you must build a safety net. Learn how to calculate your Emergency Fund and why Insurance is not an investment, but a necessity.
Key Takeaways
- An Emergency Fund should cover 3â6 months of essential expenses.
- Keep this fund in Liquid Assets (Savings Account or Liquid Mutual Funds) for instant access.
- Term Insurance is for life cover; Health Insurance is for medical bills. Do not mix insurance with investment (Endowment plans).
- Never touch this fund for vacations or gadgets. It is only for emergencies.
1. What is an Emergency Fund?
Imagine losing your job or facing a sudden medical bill tomorrow. How long can you survive without a paycheck? An Emergency Fund is a stash of money set aside specifically to cover these unexpected events.
It prevents you from breaking your long-term investments (like SIPs) or taking high-interest loans during a crisis.
Calculation Rule
Emergency Fund = Monthly Expenses x 6
If your monthly needs (Rent + Food + EMI) are âš30,000, your target is âš1,80,000.
2. Where to Park Your Emergency Fund?
The goal is Liquidity (easy access) and Safety , not high returns.
- â Savings Account: Keep 1 month's expense here for instant UPI access.
- â Liquid Mutual Fund: Keep the rest here. It earns better than savings (~6-7%) and can be withdrawn in 24 hours.
- â Stock Market / Real Estate: Too risky or hard to sell quickly.
3. Insurance: The Second Layer of Protection
While an emergency fund handles small crises, Insurance handles the big ones.
A. Term Life Insurance
Pure protection. If you die, your family gets a large sum (Sum Assured). Premiums are low. Avoid "money-back" policies; they offer low cover and low returns.
B. Health Insurance
Medical inflation in India is 14%. A single hospitalization can wipe out your savings. Get a personal health cover even if your employer provides one.
Don't build the roof (Investments) before the foundation (Insurance & Emergency Fund).
Do It Now: 3-Step Safety Check â
- Calculate: Add up your monthly fixed expenses. Multiply by 6. That is your target.
- Start: Open a separate bank account or start a Liquid Fund SIP today for your emergency fund.
- Review: Check if you have adequate Term and Health insurance. If not, prioritize buying them.