The uncertainty of everyday life is apparent to all of us. We never know what the future holds and when an emergency may crop up. According to the tenets of sound financial planning, it’s always best to stay prepared for any uncertainty along the way. An emergency fund is crucial in tackling unforeseen expenses while ensuring you remain financially afloat.

While young investors understand the importance of an emergency fund, they often wonder how much the emergency fund should hold.

• An emergency fund ensures financial stability during uncertain times.
• Multiply your monthly expenses by 6-9 months to estimate how much you should have in your emergency fund.
• Store your emergency fund in low-risk and easily accessible instruments like high-yield savings accounts, liquid funds, and FDs.

An emergency fund is a contingency fund that holds money for unforeseen emergency situations. This fund acts as a financial safety net during urgent financial crisis situations like job loss, salary cuts, urgent home repairs, and medical emergencies. For instance, if you face a sudden job loss, you can rely on your emergency fund to cover your rent and living expenses until you find a new job. Essentially, your emergency fund provides a financial buffer in uncertain times. It ensures unexpected expenses remain covered without compromising your investments or long-term goals.

The answer to the question, ‘How much emergency funds should I have saved up?’ depends entirely on your age and monthly expenses. According to financial experts, you must have enough funds to cover at least 6 to 9 months of your living expenses. Let’s take an example to understand this better. Suppose you earn a monthly salary of Rs. 60,000 and out of this Rs. 45,000 goes towards your expenses. In this case, your emergency fund should have around Rs. 2,70,000 to Rs. 4,05,000 (Rs. 45,000 multiplied by 6 or 9).

You can use the following formula to estimate how much emergency funds to put aside:

You must also be aware of where to store your emergency reserves. Experts suggest investing your emergency fund in a secure, low-risk investment instrument that’s easily accessible to meet cash flow needs. Here’s a list of emergency fund investment avenues you can consider to park your contingency funds:

• High-yield savings accounts: High-yield savings accounts are a logical option when considering liquid investment options. Opting for a high-yield savings account instead of a regular one allows you to earn a little extra on your balance while keeping your deposited funds safe and secure. Some high-yield savings accounts offer interests of up to 6%, which is much higher than regular bank accounts that average between 2.5% and 3%. To avoid the temptation of making withdrawals, it's best to open a separate high-yield account dedicated to simply your emergency funds.

Fixed deposits: Fixed deposit accounts are one of the most preferred investment avenues among Indians. Apart from capital safety, they also offer higher returns than savings accounts, averaging returns of 6%-10% annually. If you are looking at fixed deposits as an option, you can earmark an existing FD or open a new one to build your emergency fund. While FDs offer easy liquidity benefits, you should remember that banks tend to levy a penalty interest rate cut on your returns upon premature withdrawals and closures. You can consider investing Bajaj Finance Fixed Deposit. With a top-tier AAA rating from financial agencies like CRISIL and ICRA, they offer one of the highest returns, up to 8.60% p.a.

• Liquid mutual funds: Liquid mutual funds are also prudent investment avenues when it comes to emergency funds. Liquid mutual funds are debt funds that invest in bonds with maturities of up to 91 days. While they are low-risk funds, their market-linked performance ensures a better return potential than FDs and savings accounts. Most liquid funds also lack exit loads that are common for short-term debt funds.

No one can predict when an emergency will strike. That’s why remaining prepared and vigilant at all times is crucial. Building an emergency fund early helps you stay ahead of the curve. Understanding how much should be in your emergency fund at a young age ensures that unplanned future expenses and urgent situations are financially covered. By estimating your living expenses for 6-9 months and placing your funds in accessible investments like high-yield savings accounts, FDs, and liquid funds, you can build a reliable emergency corpus and earn returns.