It is highly essential for everyone to have an emergency fund before they can think of investing in their short-term as well as long-term goals. While we can make a great plan for all our goals and keep investing for them, any emergency that comes down the road can adversely impact this perfect investment plan unless we have separate funds to manage these emergencies.
With that said, let’s get started.
Step 1: Determine the Amount
First, decide how much money you need in your emergency fund. While the common trend is to save six months of expenses, this amount can vary based on individual circumstances.
Below are some scenarios:
- For a salaried individual with a regular monthly income, the emergency fund should typically cover 6–8 months of expenses plus any EMIs.
- For professionals with irregular income, the emergency fund should cover 10–12 months of expenses, including both professional and household expenses.
- For a businessperson, the emergency fund should also cover 10–12 months of expenses necessary to run the business and household. However, if the business has healthy cash flows, 5–6 months of expenses may be sufficient.
- For a retired individual, the emergency fund should cover 10–12 months of expenses plus a provision for medical expenses if they lack adequate medical insurance coverage.
