25 October 2016Last updated

Features | People

Ask the expert: building up an emergency fund

Emergency could be categorised into short-term and long-term

4 Sep 2016 | 11:27 am

We are a young couple earning a good income. We want to plan our savings and structure our funds for any emergency. Could you suggest a strategy?

It is extremely imperative for every individual to understand how to structure funds for a rainy day. Having an adequate emergency fund that’s readily accessible means you can sail through unforeseen situations without having to borrow money 
from friends or take a loan from a bank – which will only serve to further worsen your financial condition due to all the interest you’ll have to pay on the loan.

As a rule of thumb, one should have enough liquidity in a savings bank account or a money market instrument to cover your daily expenses for a minimum of four to six months.

Emergency could be categorised into short-term and long-term. The short-term crisis funds should cover instant potentially major expenses, such as medical issues, household repairs or car maintenance. This money needs to be within reach either deposited in a current or savings account.

The long-term emergency fund covers extensive crises including death, job loss, a natural calamity or accidents such as a fire. Funds to tide over such situations can be stored in the form of an investment and should be able to cover costs for about six to nine months.

It’s critically important to understand in which form the funds are to be allocated and readily quantifiable in the incident of emergency. 
The most stress-free way to deposit the money is in a bank account.

However, this may not always be the best option as one cannot relish all the benefits of various financial investment instruments available in the form of Sukuk bonds, fixed deposits, systematic investment plan, insurance, property, savings certificate, Sharia-compliant investment products or stocks trading. To do this appropriately, consider how to use your liquidity and allocate a share of your savings accordingly.

It’s also essential to set a target for your financial goal within a definite time frame. For this you need to monitor your investments regularly and alter the options depending on the performance of the investment funds.

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Dhiren Gupta

is a Dubai-based finance and real estate advisor