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12 January, 2024

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All the financial information provided is for educational purposes, based on
my learnings throughout my life from various sources. I am not a financial
expert, and I do not endorse any investments, strategies, or stock markets.
Please consult with financial professionals before making any financial
decisions.

An emergency fund is a cash or fund reserve which can be accessed instantly whenever there is an emergency. Keeping an emergency fund will make your life more secure and stress-free. It is advised that you should have at least 12 months of emergency funds (For some keeping funds of 3 to 6 months are also enough).

An emergency fund is for:

- If you get laid off/fired/resigned from your current job, and you need time to find a new job.
- Whenever there is a financial crisis or recession or high inflation in your country.
- Unexpected health issues in your family which can cause large hospital bills.
- Emergency car or home repair.
- Emergency need of money in the house.

An emergency fund is not for:

- Buying expensive clothes, shoes, or wishlist items.
- Travels, parties, and vacations.
- Spending money on liabilities which is not an emergency need.

The simple rule to calculate any emergency funds is to multiply your monthly income by 12 (for 12 months of funds). But this is not the right way as one can have a higher income but less expenses or vice versa. Finding the right amount is also important as if you save less you might be in trouble, if you save more than required then you could have invested that extra money somewhere else and can get gains.

Everyone has a different family, maybe you are the sole bread earner in your family or your family has more than one earning person. So instead of relying on income to calculate emergency funds, we should take expenses into account.

Let's see a step-by-step process to calculate the emergency funds required. Although no calculator will give the precise amount, with this process you will get the amount closer to accurate.

- Component A (House): Any amount that you spend on fixed items such as house rent, house maintenance, house tax, and house mortgage.
- Component B (Utility): Any amount that you spend on utilities such as Electricity, Gas, Water, Garbage, Internet, Wifi, Mobile Recharge, etc.
- Component C (Food): Any amount that you spend on groceries, food items, restaurants, take-away or dining, diets, child food care, etc.
- Component D (Transport): Any amount you spend on regular transportation such as public transportation fees or your car, bike, or vehicle fuel amount.
- Component E (Insurance): Any amount that you pay for insurance, it may be life, health, or other insurance.
- Component F (Other): Any other expenses that are needed or useful to you such as ongoing medicines, entertainment subscriptions, educational books or course expenses, etc. Don't include expenses that can be compromised like expensive travel, or buying shoes or sneakers, and so on.

Component A to Component F will give you the basic monthly expenses of your family. You can multiply this by 12 (or 6 or 3) to get your emergency fund amount. But this is still not valid for everyone. To get a more accurate amount you also need to take other things into the account. Before proceeding, calculate the Basic Amount: The sum of all amounts from Component A to Component F. Now you need to also calculate:

- Parents Amount: If you live with your parents, then you also need to take care of it. Multiply the Basic Amount by 0.8 (if you have both your parents) or 0.4 (if you have a single parent) and mark it as Parents Amount.
- Wife Amount: If you are married, then you need to multiply the Basic Amount by 0.8 and mark that amount as Wife Amount.
- Kids Amount: If you or your family have kids then for every kid you need to take the equivalent Basic Amount. If you have 2 kids, then the amount will be 2 * Basic Amount and so on.

Once you have calculated all the amounts, you can now get an appropriate emergency fund for your family! Just use the below formula to get it.

Final Amount: (Basic * 12) + Parent + Wife + Kids Amount. You can change the number 12 with 6 or 3 as per your required months.

You can also use the following calculator or refer to the below examples to better under the calculation.

House rent, tax, maintenance, mortgage, etc

Electricity, Gas, Water, Garbage, Internet, Wifi, Mobile Recharge,
etc.

Groceries, food items, restaurants

Public transportation or vehicle fuel.

Amount that you pay for insurance

Medicals, subscriptions, courses, books, ect.

You must save 0 as your emergency fund amount.

Example 1: You are a single person living with your parents (both mom and dad).

In this case, let's say your

- Basic Amount (Component A to Component F) = INR 20,000 (or 250$).
- Parents Amount: INR 16,000 (or 200$). Since you live with both parents, so multiply the Basic Amount by 0.8 factor.
- Wife Amount: INR 0 (or 0$). Since you are single.
- Kids Amount: INR 0 (or 0$). Since you are not married, so there are no kids in your family.

Final Amount in INR: (20,000 * 12) + 16,000 + 0 + 0 = INR 2,56,000

Final Amount in USD: (250 * 12) + 200 + 0 + 0 = 3,200$

Example 2: You are a married person living with one parent. Also, assume your family has 2 kids.

In this case, let's say your

- Basic Amount (Component A to Component F) = INR 20,000 (or 250$).
- Parents Amount: INR 8,000 (or 100$). Since you live with only one parent, so multiply the Basic Amount by 0.4 factor.
- Wife Amount: INR 16,000 (or 200$). Since you are married.
- Kids Amount: INR 40,000 (or 500$). Since your family consists of two kids, taking 2 * Basic as amount.

Final Amount in INR: (20,000 * 12) + 8,000 + 16,000 + 40,000 = INR 3,04,000

Final Amount in USD: (250 * 12) + 100 + 200 + 500 = 3,800$

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