Establishing an emergency fund is the initial step in achieving financial stability. The amount of funds needed for emergencies cannot be calculated accurately as it varies based on personal outlook. It depends on the individual’s experiences with unfortunate events and their frequency, whether positive or negative.
It’s important to note that experts recommend having an emergency fund equivalent to 3-6 months’ worth of expenses, primarily for those who currently don’t have any savings. While a fund of this size helps cover certain unforeseen expenses, such as job loss, and car or appliance repairs, it has limitations. It’s essential to remember that the term “expenses” encompasses all EMIs wrt an emergency fund.
Most people are under the impression that such an emergency fund (3-6 months’ worth …), along with adequate pure-term life insurance and adequate health insurance (employer-based +/- private), is enough to tackle all life’s problems.
Such people have either been lucky (so far) and/or are too young to have experienced/seen/heard of anything bad. Good for them. Unfortunately, past performance is not … well, you know the drill!
Most people use the term ‘cashless’ when discussing health insurance like it is some panacea – the cure for all hospitalization-related money issues. A cashless claim is just one way of claiming hospital bills and is applicable only under certain circumstances. An insurer has to permit a cashless claim before treatment is started (other than basic first aid and stabilization), and it is often rejected! This implies that the patient must pay the bills and then make a reimbursement claim (hoping it will be honoured!).
Join 32,000+ readers and get free money management solutions delivered to your inbox! Subscribe to get posts via email! (Link takes you to our email sign-up form)
🔥Want to create a complete financial plan? Learn goal-based investing? Exclusive access to our DIY tools? Increase your income with your skills? Use this link to enjoy massive discounts on our robo-advisory tool & courses! 🔥
With medical expenses increasing annually at an alarming rate (15-20% is a conservative estimate!), would an emergency fund worth just 3-6 months of expenses suffice under such circumstances? Having liquid cash worth at least 50% of your mediclaim cover is prudent. Since it is important to increase the mediclaim coverage annually by as much as you can, the same applies to this segment of the emergency fund!
Many who take term insurance believe that they will not die anytime soon, and/or if they do die, all their nominee has to do is make a claim application, and the insured amount will be dispensed forthwith! I would strongly urge such people to read this: The Games Life Insurers Play!
Never forget this: Term insurance is the cheapest of all insurance plans. At the same time, the sum insured in a term plan is the highest. Therefore it will be subject to close scrutiny. Therefore delays in claim settlement are quite common for a variety of reasons (how one dies, when one dies, the nominee dead or injured etc. etc. etc.). So when you take a term plan, ensure that, over a period of time, you slowly build an emergency corpus that will cover at least 12-15 months of expenses in the event of your death. Hopefully, this buffer will provide enough time for all parties (insurer, nominee and ombudsman, if needed) to settle the claim successfully. The nominee can handle the claim settlement process calmly and clearly. Even if, for some reason, the claim is not settled, it allows your loved ones some time to arrange for alternative sources of income.
If you think an emergency fund is a like a guardian angel on part-time duty when you are employed, you are right. Provided, of course, you realize that the moment you retire, the guardian angel is promoted to a full-time employee!
Every retirement calculator is based on assumptions, and unless you get close to retirement, it will not be possible to predict with any accuracy how much you actually need to generate an adequate pension/annuity to sustain you.
What can be said with great certainty is that the emergency fund will be a central part of ensuring your financial independence in retired life. When you are employed, a car breakdown is less serious than a pink slip. A pink slip is less serious than death. Such distinctions are harder to make in retirement.
When you are retired, any unexpected large expense will slowly but surely eat up the life of your retirement corpus. So I would like to conservatively guess that an emergency fund worth about two years of expenses during retirement would be needed, in addition to a decent corpus for medical emergencies alone! If your retirement is a few decades away, you have time to build this. Just get started!
Use our Robo-advisory Tool to create a complete financial plan! ⇐More than 3,000 investors and advisors use this! Use the discount code: robo25 for a 20% discount. Plan your retirement (early, normal, before, and after), as well as non-recurring financial goals (such as child education) and recurring financial goals (like holidays and appliance purchases). The tool would help anyone aged 18 to 80 plan for their retirement, as well as six other non-recurring financial goals and four recurring financial goals, with a detailed cash flow summary.
🔥You can also avail massive discounts on our courses and the freefincal investor circle! 🔥& join our community of 8000+ users!
Track your mutual funds and stock investments with this Google Sheet!
We also publish monthly equity mutual funds, debt and hybrid mutual funds, index funds, and ETF screeners, as well as momentum and low-volatility stock screeners.
You can follow our articles on Google News
We have over 1,000 videos on YouTube!
Join our WhatsApp Channel
- Do you have a comment about the above article? Reach out to us on Twitter: @freefincal or @pattufreefincal
- Have a question? Subscribe to our newsletter using the form below.
- Hit 'reply' to any email from us! We do not offer personalised investment advice. We can write a detailed article without mentioning your name if you have a generic question.
Join 32,000+ readers and get free money management solutions delivered to your inbox! Subscribe to get posts via email! (Link takes you to our email sign-up form)
About The Author
Dr M. Pattabiraman (PhD) is the founder, managing editor and primary author of freefincal. He is an associate professor at the Indian Institute of Technology, Madras. He has over 13 years of experience publishing news analysis, research and financial product development. Connect with him via Twitter(X), LinkedIn, or YouTube. Pattabiraman has co-authored three print books: (1) You can be rich too with goal-based investing (CNBC TV18) for DIY investors. (2) Gamechanger for young earners. (3) Chinchu Gets a Superpower! for kids. He has also written seven other free e-books on various money management topics. He is a patron and co-founder of “Fee-only India,” an organisation promoting unbiased, commission-free, AUM-independent investment advice.Our flagship course! Learn to manage your portfolio like a pro to achieve your goals regardless of market conditions! ⇐ More than 3,500 investors and advisors are part of our exclusive community! Get clarity on how to plan for your goals and achieve the necessary corpus no matter the market condition!! Watch the first lecture for free! One-time payment! No recurring fees! Life-long access to videos! Reduce fear, uncertainty and doubt while investing! Learn how to plan for your goals before and after retirement with confidence.
Increase your income by getting people to pay for your skills! ⇐ More than 800 salaried employees, entrepreneurs and financial advisors are part of our exclusive community! Learn how to get people to pay for your skills! Whether you are a professional or small business owner seeking more clients through online visibility, or a salaried individual looking for a side income or passive income, we will show you how to achieve this by showcasing your skills and building a community that trusts and pays you. (watch 1st lecture for free). One-time payment! No recurring fees! Life-long access to videos!
Our book for kids: “Chinchu Gets a Superpower!” is now available!
Must-read book even for adults! This is something that every parent should teach their kids right from their young age. The importance of money management and decision making based on their wants and needs. Very nicely written in simple terms. - Arun.Buy the book: Chinchu gets a superpower for your child!
How to profit from content writing: Our new ebook is for those interested in getting a side income via content writing. It is available at a 50% discount for Rs. 500 only!
Do you want to check if the market is overvalued or undervalued? Use our market valuation tool (it will work with any index!), or get the Tactical Buy/Sell timing tool!
We publish monthly mutual fund screeners and momentum, low-volatility stock screeners.
About freefincal & its content policy. Freefincal is a News Media organisation dedicated to providing original analysis, reports, reviews and insights on mutual funds, stocks, investing, retirement and personal finance developments. We do so without conflict of interest and bias. Follow us on Google News. Freefincal serves more than three million readers a year (5 million page views) with articles based only on factual information and detailed analysis by its authors. All statements made will be verified with credible and knowledgeable sources before publication. Freefincal does not publish paid articles, promotions, PR, satire or opinions without data. All opinions will be inferences backed by verifiable, reproducible evidence/data. Contact Information: To get in touch, please use our contact form. (Sponsored posts or paid collaborations will not be entertained.)
Connect with us on social media
- Twitter @freefincal
- Subscribe to our YouTube Videos
- Posts feed via Feedburner.
Our publications
You Can Be Rich Too with Goal-Based Investing
Published by CNBC TV18, this book is designed to help you ask the right questions and find the correct answers. Additionally, it comes with nine online calculators, allowing you to create custom solutions tailored to your lifestyle. Get it now.Gamechanger: Forget Startups, Join Corporate & Still Live the Rich Life You Want
This book is designed for young earners to get their basics right from the start! It will also help you travel to exotic places at a low cost! Get it or gift it to a young earner.Your Ultimate Guide to Travel
This is an in-depth exploration of vacation planning, including finding affordable flights, budget accommodations, and practical travel tips. It also examines the benefits of travelling slowly, both financially and psychologically, with links to relevant web pages and guidance at every step. Get the PDF for Rs 300 (instant download)