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That you need a solid emergency fund is a given. There’s really no guarantee for anything today (be it your job, your health, prices, etc.) and therefore it makes sense to build a solid emergency fund for those tough times. I thought a fair bit on how I would like to structure my emergency fund. This is what I’d like to do.
My Emergency Fund Structure:
Job-loss emergency fund: This component of the emergency fund will help tide over any job-loss situation (voluntary or involuntary). Ideally, I’d like to have a sum equal to “12-months of average monthly living expenses” in this fund. It might seem excessive, but this will give me an extra cushion if I ever want to do something of my own or try something different for a while.
General emergency fund: This component of the emergency fund will help cover any unforeseen day-to-day emergency. Examples include: vehicle breakdowns, medical emergencies, electrical goods failing at home, and such. I’ve had good experience last year, when my car was involved in two accidents, just a month apart. I had to pay upfront with the insurance checks being cleared several weeks later. A few months back, the inverter at home decided to leave Earth. Being able to cover such unforeseen expenses without having to scrimp around is the objective.
That said, where would I like to keep my emergency fund?
Obviously, this is money that you should not gamble with. Hence, I’d like to stick with high-to-medium liquidity debt instruments. A combination of Cash, short-term (between three and six months) Fixed Deposits, and debt-oriented Mutual Funds seems to be a good option. I’d ideally assemble the cash together and then move the funds into respective debt investments.
What do you think? Do you have an emergency fund in place? How have you structured your emergency fund?
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