How Much Emergency Fund Do You Need?

An emergency fund is money set aside for job loss, medical bills or urgent repairs. It exists so that one bad month does not force you to borrow at high rates or sell investments at a loss.

How do I calculate how much I need?

Add up your essential monthly costs: rent or EMI, groceries, utilities, insurance premiums, school fees and transport. Leave out holidays and dining out. Then multiply by a number based on how stable your income is.

Where should I keep my emergency fund?

• Savings account: instant access. Bank deposits are insured by DICGC up to ₹5 lakh per depositor per bank, a limit set in February 2020.
• Sweep-in FD: earns more than savings balances and breaks automatically when needed.
• Liquid fund: low risk though not guaranteed. Learn how these work.

A sensible split is one month of expenses in your savings account and the rest in a sweep-in FD or liquid fund. Avoid equity, because markets can fall at the same time you lose your income.

How do I build it without stopping my SIP?

Pause nothing if you can. Send 10% of income to the fund until you reach one month’s expenses, then split new savings between the fund and your SIP. Bonuses and tax refunds can close the gap faster.

When can I use it?

Ask whether the expense is necessary, unexpected and urgent. If it is not all three, it belongs in your regular budget. Refill the fund before anything else after using it.