SETTING UP AN EMERGENCY FUND
EVERYONE NEEDS an emergency fund.You could lose your job, or somebody in the family may need medical care--you never know what lies ahead. It is often argued that you don't need emergency cash if you have a credit card. Though a credit card does come in handy when you face a financial crisis, the cushion that plastic money provides lasts only 15-30 days, till the bill arrives. If you don't have an emergency fund, you could be forced to liquidate other assets to tide over the crisis.
Experts say one should have at least 2-6 months of expenses in an emergency fund, but this can vary depending on whether your spouse also works or you have a secure job. The best option is a sweep-in bank account or short-term debt funds. Avoid putting the emergency corpus in equity-linked instruments.If the stock market is down at that point in time, you will be forced to sell at a loss. Recall the situation in 2008, when stock prices crashed and jobs disappeared almost at the same time.
If you haven't already established an emergency fund, start putting away 10-15% of your monthly income for this purpose.Any windfall gain, such as a tax refund or an annual bonus, should also be diverted to it. However, treat this amount as sacrosanct. Under no circumstances should you dip into it for discretionary expenses.
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