emergency funds

A reader from Bhopal asks,

One basic question that has persisted with me ever since I started earning was how much money should you normally keep in your savings bank account? I mean what is the thumb rule or the threshold above which the money should be invested or siphoned. I would be thankful to you if you are able to guide me on this.

An excellent question. One for which there are many answers depending upon how financially disciplined you are.

But to begin with, let’s look at some possible scenarios where you’d typically need to have money available in your savings account –

  • Money that you’d need in case of day-to-day emergencies.

  • Money that you’d need for expected/planned short-term expenses (purchases within the next couple of months, some upcoming annual bills, etc.).

  • Money that you’d need for “short-term opportunistic investments” — if you’re into that sort of thing.

So, in a worst-case situation, you’d need to have as much money available in your savings account as is needed by you to cover the above situations. That’s one side of the equation where you believe that you always need to have “withdraw-able hard cash” to cover these situations, in which case your savings account would have a fat balance. On the other side, you can pretty much tide over most of these situations if you simply have access to a “credit card,” in which case your savings account can be pretty lean.

So, the answer to the reader’s questions is — “It depends on your personal approach to managing your personal finances.” And where there is a “depends,” there cannot be a rule of thumb.

The same answer applies even if you’re only talking about an “emergency fund.” You cannot have a general rule of thumb for the size of your emergency fund. I believe this conclusion comes about from two posts that I’d written earlier this year — the first: a simple framework for managing personal finance risks and the second: emergency funds and where to save or invest them. The two posts in isolation would lead you to believe that there is a general rule of thumb when actually there isn’t.

But place the two together and several interesting perspectives and insights arise –


Risk Likelihood Impact

For example — If you have several passive sources of income, you’d laugh at the very mention or notion of an emergency fund. Then, if both you and your spouse are employed, one person can very well tide things over until things return to normalcy. But if you don’t have a Plan B, then you’d better well have a fat balance lying around in your savings account.

So, ultimately, the answer to the reader’s question is — “As much as would let you sleep peacefully at night.”

What do you think?


Here’s something that I happened to read the other day –

I am an old man and have known a great many troubles, but most of them never happened. Mark Twain.

Leads to some interesting thoughts — How many months [worth of monthly expenses] is too many months in your emergency fund? Should you really be prepared for every possible emergency that life can throw at you? Should you (or your financial investments) really be prepared for every possible financial risk?

In my line of work, we look at a risk in terms of its likelihood (probability of occurrence) and impact (magnitude of loss on occurrence). Perhaps this could be a good framework for planning ones personal finances as well. Look at the illustration below.

Risk Likelihood Impact

For example, the likelihood of a job loss is high and its impact when you don’t have a financial buffer (emergency funds, alternate sources of income, etc.) is high. Then you really do need to worry about this scenario and work towards mitigating it. But the chart shouldn’t just be seen as snapshot at a point in time. So as you work hard towards building that financial buffer the impact starts decreasing and at a point there’s no need to worry about it any more (having a fatter emergency fund after this point doesn’t really change anything).

A good strategy would be to evaluate your risks periodically (once every quarter) against this framework — your goal should be to move everything to an “Ignore.”

What do you think?


Tweets on 2012-01-18

by Vinaya HS on January 18, 2012

in Finance



Using My Emergency Fund — Roof Repair

by Vinaya HS on September 19, 2011

in Finance

They say:

With a house things will go wrong.

Our house, built through hard work by my dad, is around 30-years old. Except for cosmetic redecoration inside, everything’s generally been the way it always has (shows the quality of construction material used back then). But of late, the roof was beginning to show leaks here and there. We had a contractor check things out and got to know that the initial couple of inches of roof-layer had to be dug up and redone. Else we ran the risk of the problem worsening.

Given the cost of construction material these days, the cost estimate turned out to be a really BIG number. In fact, we’d had the contractor give us an estimate a couple of months back but had dilly-dallied on taking a decision. In just the couple of months, the cost had increased by around 30%! Since the problem was turning worse, we had to no choice but to go for the repair at the increased cost.

Thanks to the emergency fund and a little financial help from D — I’m in negative cash flow thanks to my recent amazon.com binge — we managed to foot the expenses without breaking a sweat. Things were all noisy at home for the last two weeks and my whole attention was out there. Thankfully, everything’s fixed and done now — except for one lighting fixture that needs to go back up.

I can’t emphasize enough on the need for a healthy emergency fund. In cash. It’s saved me every time.

Also explains why I haven’t been able to announce the ERE-book giveaway winner. I promise to do that in a day or two.

Note: D’s mighty shrewd when it comes to lending me money. In this particular case, the cash deficit that she helped bridge was in exchange for some equity that I’d invested in (but whose value had gone down from when I invested and whose value now coincidentally matched the cash deficit). That’s value investing in my opinion!


Tweets on 2011-07-18

by Vinaya HS on July 18, 2011

in Finance

Rubber for the Swift and my emergency fund seem to go hand in glove.

About a year back, I had to dip into my emergency fund when I had to urgently replace the rear left tyre because a sharp iron rod tore through the tyre wall. A couple of weeks back, I had to dip into my emergency funds again since the treads on all four tyres were almost worn out and it would have been dangerous to drive around in such a condition (we’d also planned a road trip to Mantralaya).

I’d been meaning to save-up for for this expense (as a 6-month goal) and had just started, but then I happened to read about the tripod of stability and was influenced into taking immediate action.

Rs 3,900 a tyre x 4 tyres = Rs 15,600 – Rs 800 for the old set = Rs 14,800 + wheel-balancing and alignment charges. I opted for the JK Vectra’s itself since the previous set had served exceptionally well for about 49,300 kilometers.

A pretty BIG dip into my emergency fund but given that the Swift is practically our second-home, it was worth it.


The iPhone 4 Temptation!

by Vinaya HS on June 6, 2011

in Finance

It’s irresistibly tempting.

My head spins non-stop with how-can-I afford-this thoughts.

Since the iPhone 4 launched [in India], I’ve had these financially-destructive thoughts:

  • Dip — no, make that dive — into my emergency fund. In a weird way this does count as an emergency because my present phone, a Nokia E52, has had its share of knocks and the outside panel is hanging on by a bare thread.

  • Stop contributing to my financial independence/financial freedom fund for a couple of months. It’s just a couple of months right? How bad can that be? And isn’t the whole point of earning to enjoy your today?

  • Take a bridge loan from D — at exorbitant micro-finance interest rates!

  • Raise cash by selling a bunch of stuff that I own such as my old Acer laptop, my iPod Touch, my digital camera, my wireless printer, etc.

My mind tells me to throw every personal financial rule out! In fact, when the ads came out I fell for their trick — I was so blind that I didn’t realize that one needs to pay the phone’s cost upfront and recover this cost through the 24-month bill discounts. Luckily for me, D was specially vigilant and made me re-read the ad.

Marketing at its brilliance.

And thankfully, I haven’t executed any of these destructive ideas.


The maximum that they can do is to fire me — that’s OK!

Recently, I overheard a colleague say this and it’s really stuck in my mind since then. To me, that’s a sign of someone who’s financially well prepared. In fact, very well prepared. The day that you come into work and say this is the day that you truly are well prepared. Then, you don’t need your job to live.

Quick suggestions on how to get to that day.

  • Have an Emergency Fund: I’m not particularly bothered about specifying an exact amount that you need to set aside in your emergency fund. You know what’s best for you (how quickly can you get another job, what your average monthly expenses are, how many financial dependents you have, etc.). Just plan for the worst case that you can think of. Then double that if you’re in debt.

  • Have Independent Health Insurance: No job. No employer-provided health insurance. And it’s a disaster if your plan is to rely on your employment forever for health insurance. I’m a strong advocate for not having any financial link with your employer — and this happens to be one. Get rid of it.

  • Strive for zero-debt: This one’s ideal but tough in today’s world. At the very least, you ought to get rid of your non-essential debt (personal loans, overdrafts, and credit cards). For the other essential debts, don’t forget to include your EMIs in your monthly expense estimates (a key input to what you’d need in your emergency fund — see how these tie-in?).

  • Have Multiple Streams of Income: Again, this one’s ideal but certainly not tough in today’s world. And it won’t happen overnight. Just as it takes you sufficient time to get your salary to where you want it to be, building multiple streams of income will take its own time. But when you get there, you really will want to scream out “The maximum that they can do is to fire me — that’s OK!”

I screamed quite a while back.

How about you?


How to Subscribe to Capital Advisor?

by Vinaya HS on February 1, 2011

in Finance

A quick reminder.

If you’ve been reading Capital Advisor directly on the web by visiting its homepage, you might want to automatically keep up-to-date with Capital Advisor through one or more of the following channels:

So go ahead and subscribe to the option that’s convenient for you.

I’ve also been browsing through the archives digging up articles of note. Some of these are timeless and hold good to this day. Others reflect my thoughts and experiences at that point in time but which have now changed. Thought it’d be good to bring these up as refreshers.

One-year back on Capital Advisor

Be careful who you act as a reference for. The advise in here is timeless. Since then, I’ve heard from D that one of her closest relatives suffered a serious financial setback since he’d guaranteed someone’s liabilities.

Two-years back on Capital Advisor

Personal finance products that must be avoided. Though the absolute number of such toxic financial products has reduced a bit, they’re still around sometimes under different names. You’d best learn to recognize them and to avoid them.

A strategy for using credit cards for emergencies. By the end of this year, my emergency fund will be equal to the credit limit I have on my credit cards. I can then safely use my credit cards in case of emergencies.


Asked and Answered: January, 2011

by Vinaya HS on January 28, 2011

in Finance

I sometimes receive queries over email from readers who are in a particular situation with respect to their personal finances and want to know what actions they ought to take in order to move ahead. Some of these queries are generic enough to apply for a broader audience. In the past, I’ve tried publishing these ad hoc in one way or the other, but would like to have a more organized approach moving forward. My plan is to collate these queries and my responses over a period of one month and publish them here.

Here’s what was asked and answered by Capital Advisor in January, 2011.

Query #1: Saving for higher education.

I want to save for the higher education of my 2 daughters aged 13 years and 11 years. I’m already investing Rs 5,000 per month in the Post Office Recurring Deposit since 1 year. I can set aside (at maximum) another 4,000 to 5,000 rupees per month. I am a single parent and cannot invest more that this. What should I do? Please advise.

Since you have started a Post Office RD for Rs 5,000 per month a year back and since the Post Office RD requires you to make monthly contributions for a period of 5 years, I’d suggest that you put the additional Rs 5,000 per month into what I’d call a buffer fund. Being a single parent, you could run into a financial situation (for whatever reason) where you’re unable to make the monthly contribution into the Post Office RD and that’s where the buffer fund would be quite handy.

First save up a 6 to 12-month buffer fund. This will cushion you against defaulting on the RD in the event of an economic hardship. Once you do that, you could consider investing the additional Rs 5,000 each month in a Moderate Allocation Fund with a great track record. I particularly like HDFC’s Prudence Fund (Growth option) — I have a SIP in D’s name.

Useful Reading: MorningStar Fund Investor — November, 2010.

Query #2: Building a contingency fund through high-returns investments.

I am looking for an investment scheme wherein I want to invest biweekly or monthly with a variable amount (say Rupees 2,000 or 5,000 or 10,000 — depends on the amount I have with me) and which gives higher returns (15%) and from which I’d be able to withdraw at any point in time.

Follow-up revealed that the reader wanted to do this for contingency planning (read emergency use).

I’m afraid that’s the wrong approach. Funds meant for contingency planning or emergency use shouldn’t be put in investments that seek to generate higher returns. Funds meant for contingency planning/emergency use need safety of capital (read as low a risk as possible) whereas investments that seek to generate higher returns promise exactly the opposite.

If you’re still willing to be adventurous, I’d recommend that you preferably stick to a Conservative Allocation Fund — you can begin your research here.

Query #3: Prepaying a housing loan.

I have a home loan of around 10.5 lacs. I have saved 5 lacs in the form of a fixed deposit and have earmarked this as an emergency fund. I’ve been thinking of using this for making part prepayments on the home loan but haven’t taken a decision yet. I also have a ULIP from ICICI Prudential with an annual premium of 1 lac. It completes 4 years next year and I want to close this and invest in a Post Office Monthly Income Scheme. What would you suggest?

Wouldn’t it be a better idea to close your ICICI Prudential insurance policy sooner? If you’ve already completed 3-years, you can surrender it right away. Think about the Rs 1 lac that would straightaway appear on your cash flow each year. You can use this to make part prepayment on your home loan (and make your home truly yours) instead of dumping it in that lame insurance policy for another year (and making ICICI richer!).

If your goal is to be debt-free, you could also use the surrender proceeds to make an immediate and huge prepayment on your home loan. But if your goal is to create a passive source of income, you could opt for the Post Office Monthly Income Scheme and do what I suggested earlier.

I’d continue to keep the Rs 5 lacs as a major-emergencies fund — probably split it into 5 fixed deposits of Rs 1 lac each.

Would you recommend anything different?


S asks,

Suppose you have a loan that you desperately want to close. Is it worth dipping into your emergency fund for this purpose?

I can find convincing arguments on both sides. If you take this step, you get an immediate return on your investment (equal to the interest rate on the loan) but you expose yourself to the terrible risk of a cash crunch. And if you don’t, you’re safe in the short-term but you end up paying a whole lot of interest to the bank.

What should one do?

My advise is quite simple:

Closing a loan is never an emergency and should never be done at the cost of dipping into your emergency fund. The safest way to close a loan lies in utilizing your free cash flow. If your loan allows penalty-free prepayments against the principal, then use whatever free cash flow you have at the end of each month towards prepayment. Else accumulate your free cash flow until you can make a significant dent. This way you achieve your objective — albeit slower — without putting yourself into undue risk.

What do you think?

In fact, I’ve actually been in this situation recently. When I got very very close to closing the loan on my Swift, there was this strong inner voice that kept urging me to dip into my emergency fund and bridge the gap. Instead, I stuck by my rules, cut my spending further, increased my free cash flow, and finally closed the loan. It works!

You might also find this worth a read: Pay Cash or Not? Cash Flow Versus Liquidity.


A reader asks,

I have an emergency fund that doubles up as a buffer for unforeseen expenses and for the pink slip. I currently have three-months’ worth of expenses in this fund which is lying as a cash balance in my savings account. How can I structure this fund in order to earn a better return?

What do you think of this strategy?

  1. Retain 1/4 of the fund as a cash balance in the savings account.
  2. Move 3/4 of the fund into a pure-debt fund.

I did some research and found HDFC’s Cash Management Plan Savings Plan (Growth) (no entry load, no exit load, high liquidity) to be a good choice for #2.

What do you think?


Using My Emergency Fund — Car Repairs

by Vinaya HS on August 26, 2010

in Finance

I guess emergencies come in bunches. First it was the rainwater harvesting project and soon after that the rear left tire on my Swift shredded — I had parked at a friend’s place and while reversing, construction debris in the form of a sharp iron rod tore right through the tire wall . I had to replace the damaged tire with a new one since the repair shop said that while the damage could be repaired, there was no guarantee of it holding at high speed.

Cost Rs 4,000.



Using My Emergency Fund — Rainwater Harvesting

by Vinaya HS on August 25, 2010

in Finance

A couple of weeks back, I had to dip into my emergency fund for complying with the rainwater harvesting norms (and once the construction/installation was over, the deadline was pushed further — again!). But it had to be done sooner or later and also came as an unexpected — and hence unbudgeted — expense. That we found a huge boulder halfway into the construction meant that the costs ballooned. The final cost was Rs 25,000!

That’s what I meant when I said that with personal finance, it’s definitely the planning and being organized that helps you deal with any uncertainty (that [often] has a financial impact) and that helps you to move ahead in life. You simply don’t worry about these things.

Now, it’s time to replenish that emergency fund.


A colleague asked,

I want to set aside an emergency fund purely to handle any loss of employment situation that I might face. What would you recommend?

Here’s what I recommend:

  • First, estimate your monthly expenses (including EMIs, monthly savings for annual expenses, and routine household expenses). Let’s say this amount is M.
  • Structure a 6-month fixed deposit ladder (i.e. one fixed deposit each month for six months with each fixed deposit maturing in six months). Each fixed deposit should have it’s face value equal to M.

Now suppose you do lose your job. You only need to wait for that fixed deposit with the nearest maturity date to mature, close it, and use the proceeds for your monthly expenses. Of course, once you’re back in a job, you will need to put the ladder back in place. I also believe that the interest you earn will more or less account for any inflation, but when you don’t have a job, concerns about inflation should be the last thing on your mind. What should be on your mind, however, is frugality.

How does this strategy sound?


Real-life Lessons: The Value of an Emergency Fund

by Vinaya HS on February 11, 2010

in Finance

There was a recent circular issued by the Central Board for Direct Taxes (CBDT) that reads:

The Finance Act, 2005 introduced a levy namely Fringe Benefit Tax (FBT) on the value of certain fringe benefits as contained in Chapter XII-H (sections 115W to 115WL) of Income-tax Act, 1961. By the Finance (No. 2) Act, 2009 a new section 115WM was inserted to abolish the FBT with effect from assessment year 2010-11. Consequently, benefits given to employees are taxed as perquisites in the hands of employees in terms of amendments to clause 2 of section 17 of Income-tax Act, 1961.

Note the highlighted words — benefits given to employees will now be taxed as perquisites in the hands of employees [in the current financial year]. This means you will now have to pay income tax on benefits such as vehicle fuel and maintenance, communication expenses, etc. — expense items for which you were so far not required to pay income tax since your employer was bearing the tax burden in the form of FBT.

Given that,

  • this change is applicable for the Financial Year 2009 – 10, and
  • there are hardly two months left in the Financial Year,

many of us might find ourselves in a situation where most of our salary would go towards paying this income tax deficit in the months of February, 2010 and March, 2010. That means you might potentially have negligible to no salary for the next couple of months.

This is where an emergency fund proves its worth. With an adequate emergency fund in place, you wouldn’t have to worry about such unforeseen situations. I am affected by this ruling — thankfully, I do have an emergency fund.

How about you? Are you affected by this ruling? If yes, how are you handling it?


I have often heard the argument that the credit limit on a credit card serves the purpose of an emergency fund. This strategy by itself is both myopic and dangerous. However, what can make this strategy both farsighted and safe is if you have a real emergency fund with real cash in a savings account backing up your credit card. The credit card gives you the immediacy of funds in an emergency but immediately pushes you into credit card debt which you can now quickly get rid of by using the real cash balance in the savings account. The best of all worlds in my opinion.

What do you think?

Tip Tuesdays is my initiative to share practical personal finance tips — every Tuesday. I’d be delighted if you could share a tip or two from your own experiences. Drop a comment to submit your tip. And, as always, do spread the word if you find this useful.


The past one-and-half months have been traumatic as my mother’s health has steadily deteriorated into a critical condition. We’ve given her the best medical care possible — probably that’s what has kept her going this far. I couldn’t have afforded this medical care if it were not for three things:

  1. Clearing my debts and keeping out of debt,
  2. Building a substantial emergency fund, and
  3. Having independent health insurance.

Just a couple of years ago, I had a lot of debt to be repaid, no emergency fund, and no independent health insurance for my mother. I’m not sure what I’d have done — without going deeper into debt — if the present emergency had happened back then. In fact, I don’t even want to think about it. All the personal finance reading and research that I have done and the financial plans that I have executed over the past couple of years have proved their worth — many times over — today. Just imagine if one has to bear both psychological and financial traumas in such a situation.

If you haven’t yet got your financial house in order, there’s no better time to start than today. Believe me. It’s never too late to be prepared. I’d be glad to share my experiences and help.


How Would You Structure Your Emergency Fund?

by Vinaya HS on June 17, 2008

in Finance

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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