An emergency fund is money kept aside specifically for unexpected situations such as job loss, medical expenses or a sudden fall in income.
RBI’s financial-education material recommends maintaining an emergency fund sufficient to cover at least three months of living expenses. Those who are self-employed, run a business or have less-secure income may consider maintaining six months or more.
For example, if your essential monthly expenses are ?50,000:
3-month emergency fund: ?1.50 lakh
6-month emergency fund: ?3 lakh
RBI suggests keeping emergency money in a separate, easily accessible savings account and building it gradually if the required amount cannot be accumulated immediately.
SEBI’s investor-education guidance also identifies building an emergency fund as an important part of managing income and expenses.
Bottom Line: Before aggressively investing for long-term goals, ensure that unexpected expenses do not force you to borrow or prematurely sell investments.
