March 13 , 2013
Everybody appreciates that to be successful with personal finances one needs to plan investments according to goals. While we all try to do this, a random undesired event can leave a huge dent on the corpus we have been trying to build. Or worse it can send us to the lenders. Having a reserve to manage such possible blows is just as essential as having an insurance policy.
In fact we can take cue from the humble yet wise ants. In summer they work extra to store enough for the winter when they can't get out. In our case this means building a money back-up and also buying insurance policy to cover risks that are too huge.
Need for emergency funds
Keeping a reserve is simply saving money for the rainy days. There can be a medical emergency in your family; there could be gap period between job changes; you might have an emergency car/house repair etc.
Digging into your planned investments like PPF, long term FD, mutual funds etc can have adverse effects due to extra money being paid as penalty or short term capital gains tax . A contingency fund meant just for this purpose is ideally where you should turn to on such a rainy day.
Making a personal emergency fund
You can put aside money that can take care of 3-6 months' expenses. Since you might have to hit this fund anytime it needs to be in a very liquid instrument. You can choose a short term FD or a debt mutual fund.
Once done, try and ensure that nothing of this goes for petty expenses!