Subra has Rs 1 lakh of emergency fund. Should Subra use that money to invest in ELSS to save some Income tax? – Reader’s Question.
I asked her – how much is your monthly expenses? She said – Rs 50,000 but could go up to Rs 70,000. How much time did it take to build this Rs 1 lakh as emergency fund?
She said -about 8 months.
This is what I told her: You need about Rs 4-6 lakh as emergency fund because you have young children and ageing parents to support. Right now, you have only Rs 1 lakh and you have struggled reaching here. Also, using Emergency fund for investing or even paying Income tax is not the best way to handle money! Paying taxes is better than investing in ELSS especially for you.
I would suggest you to start a SIP in an ELSS fund for R4,000 and a RD in a bank for Rs 5,000. At the end of the year, you would have invested Rs 48000 in ELSS and have a further Rs 60,000 in your emergency kitty. Your Emergency Fund should primarily be used for unexpected and urgent expenses for you or your parents that could impact you if not addressed promptly. Here are some specific scenarios where using your emergency fund would be appropriate:
Medical emergencies: Sudden health issues or accidents that require immediate medical attention, especially if your insurance does not cover all costs or if you need to pay upfront. If your medical insurance is not cashless, you should charge it on your credit card. On the due date, use your emergency fund.
Job loss: If you’re unexpectedly laid off or lose your job, the emergency fund can help cover living expenses while you search for new employment.
Urgent home repairs: Emergencies like a refrigerator breakdown, or some major plumbing work, or electric work – has to be done, can be funded using EF. .
Car repairs: Essential repairs if your vehicle breaks down unexpectedly, and you rely on it for work travel.
Unforeseen travel: If you need to travel unexpectedly due to a family emergency or other critical situations. Of course, your credit card is what you will use, but on the due date you may have to use your emergency fund!
Legal expenses: If you suddenly face legal issues that require immediate action or payment for legal fees. This is not very common, but if something were to come up, you will have to turn to EF for funding!
Expenses should meet the following criteria:
Unexpected: You did not anticipate them in your regular budgeting.
Urgent: They require immediate attention or payment.
Necessary: The expense is critical for maintaining your or your family’s well-being or financial stability.
It’s also important not to dip into your emergency fund for non-emergencies or discretionary spending like vacations, electronics upgrades, paying income- tax or non-urgent home improvements. Replenishing the fund after use should be a priority once the emergency has passed.