Frequently Asked Questions On Emergency Funds
Do I need to create an emergency fund? I have a credit card with enough credit limit to support six months of expenses?
The straight answer is No. Spending on credit card is equal to borrowing. You would need money to make the emergency payments right? Even if spent on a credit card. Credit card debt is one of the most expensive forms of debt. Never borrow on a credit card.Should my emergency fund be equal to ‘n’ months of income or expenses?
It should cover your essential living expenses. When you consider your monthly expenses, you must consider everything. Include expenses to run your household, pay the tuition fees for your children, make your insurance payments and meet your EMI obligations.What can I exclude from my emergency fund?
Entertainment expenses, eating out, travelling, could be eliminated.Should I include my monthly investments to my emergency corpus?
No, this only makes it too complicated. Avoid adding your investment comittments to emergency fund. If you are in a state of emergency, you would not want to focus on investing your money.I don’t have any dependents. Should I still have an emergency fund?
You may not have any dependents but you do have fixed expenses every month. Provide for those expenses. Create an emergency fund.I created an emergency fund five years back. I have not had any kind of emergency yet. Can I get rid of the emergency fund?
You will have a probability of an emergency as long as you are alive. It’s best to re-evaluate if the emergency fund is equal to the number of months of expenses initially planned. Your expense pattern may have changed in five years.How big should be my emergency fund? Everyone says it must be equal to 6 months of expenses.
There is no straight answer to this question. The industry recommends six months as thumb rule. The size and need for a fund depends on person to person. Read this post for more details.
Factors determining the size of emergency fundsIs there a possibility to get some returns on the emergency fund investments?
Returns are not important for an emergency fund. Safety and liquidity are. You can definitely make some returns if you invest in fixed deposits or liquid funds.
Read our post on Where should you invest your emergency funds?Apart from providing for fixed expenses, should I also provide for unplanned expenses like repairs of appliances, car etc?
Yes, ideally there should be a provision for expenses which will disrupt your normal way of living. While entertainment can be compromised for a few months, you would not be able to compromise on a washing machine break-down. Add some provision for such expenses when creating your emergency funds.Hit like below if you learnt something.
Please help me spread the word. Use the share button to share it with your friends and on your social network.
Here are some of the latest posts at contrarian living-
I also send a weekly newsletter where I share updates on things I’m reading, thoughts on money, and some reflections from my life.