How to build an emergency fund – Find out

Emergency funds are specifically created for the unprecedented events of life which could come uninvited. These funds are also required to be kept aside, in case there is a job loss in the family and the family needs to pull off expenses till the time another job is found. 

Shiv Parekh, Founder of hBits says, “EMIs on home and car loans, school fees, etc., for a duration of say, six months to a year, in the event of a financial crisis arising, health issues or the death of the earning member also requires emergency funds.” 

Therefore, for an emergency fund, the investments are suggested to be made only in specific assets which generate safe and stable returns and provide high liquidity. So that they can be sold off instantly when the need arises.

How to build an emergency fund? 

To build an emergency fund, Parekh explains, “one needs to set a target date, take stock of existing assets, set aside a lump sum amount under an open-ended fund scheme which can be withdrawn in case of any kind of emergency.” 

For an emergency fund, it is suggested that one should draw a monthly commitment towards their fund and try to have a different or separate account for accumulation. Experts say this is the base for building a corpus for an emergency fund. Once the base is built, the funds can keep getting stocked up. 

How much should you have as an emergency fund? 

Depending on your income and expenses, an emergency fund can be equivalent to three to six months of one’s monthly income. Having said so, start small. Start putting away a small amount of money and then slowly increase your corpus. 

Should you look at fractional ownership to build an emergency fund?

Commercial real estate is known to be a good option for building an emergency fund, however, the steep buying price is often a deterrent. That’s where, Parekh says, “one could consider commercial property investment through fractional ownership which allows participation in the market through the purchase of pre-leased commercial property in ticket sizes of Rs 25 lakh, making it affordable to the average investor.”

According to some experts, the key reasons why one should consider fractional ownership for creating their emergency fund are liquidity, stability and assured returns. 

Fractional ownership generates rental income of 8-10 per cent per year and capital appreciation of 5-10 per cent annually leading to high returns. Parekh adds, “It is more liquid than residential real estate, as it is easier to find genuine buyers and liquidate the investment.” 

Many fractional ownership platforms also help owners list their property on the site with an average wait time for liquidation of a few months. Experts say the comparatively low wait time means there is no need to enter into a distress sale and lose out on one’s capital investment.

Parekh says, “Individuals looking for a place to park their wealth can look at fractional ownership in combination with other options like liquid funds. The monthly rent from investment can add to the income and help one tide over an emergency.”

He further adds, “One can also sell off the investment at a profit in case he or she has to meet a large demand for funds. A unique model that combines safety, liquidity and good returns, fractional ownership is a great option to store and grow an emergency fund.”