If you’re taking out a home or car loan, it’s natural to stress about your monthly EMI. Those in the private sector often have job security concerns that add to this worry. Ria finds herself in a similar boat. Raj, who works for a private company, recently bought a flat for Rs 50 lakh. He put down Rs 15 lakh and took out a loan for Rs 35 lakh, which means his monthly EMI is Rs 30,000, and he’ll be paying it off for the next 20 years.

 

Now, if Ria decides to invest 20% of her EMI in a Systematic Investment Plan (SIP), she could potentially see returns of up to Rs 41 lakh over 20 years. By investing Rs 14,40,000 during that time, she could end up with more than Rs 55 lakh. So, while Raj is paying Rs 38 lakh in interest for his home over 20 years, by keeping up with his EMIs, he could build a substantial fund of over Rs 55 lakh, despite the interest costs.

 

The same principle applies when buying a car. Many people suggest avoiding car loans because by the time you pay it off, the car’s value has dropped significantly. Unlike real estate, cars depreciate rather than appreciate. This means the interest you pay on the loan adds to the overall cost, and when you sell the car, you might get back only a fraction of what you paid. To offset this loss, you could consider investing in an SIP to counterbalance the interest on the car loan.

 

Additionally, Ria has the option to save around Rs 14 lakh in 10 years. If she chooses, she can use this amount to make a lump-sum payment on her loan, which would shorten the duration of her EMIs. This fund could also serve as an emergency reserve during tough times. However, since market returns can be unpredictable, relying solely on this as an emergency fund might be risky. Raj should also aim to have an emergency fund that covers 2 to 3 years’ worth of EMIs, ensuring he can manage payments without any hiccups.

 

How can you create an emergency fund?

Ria has secured a home loan of Rs 35 lakh for a duration of 20 years, with a monthly EMI of Rs 30,000. The key question is how to build an emergency fund that ensures the loan EMI remains unaffected during any financial emergencies.

 

What should the size of an emergency fund be?

Aim for at least 6 months’ worth of EMI plus other necessary expenses. If job security is uncertain, consider saving for 12 months instead.

Monthly EMI = Rs 30,000

Monthly essential expenses (like rent, groceries, bills, etc.) = Rs 20,000 (for example).

Total minimum monthly expenditure = Rs 50,000.

Minimum fund for 6 months = Rs 50,000 × 6 = Rs 3 lakh.

For added security, a 12-month fund would amount to Rs 6 lakh.

Raj should aim to set aside an emergency fund of at least Rs 3-6 lakh.

 

Where should you keep your emergency fund?

Your emergency fund should be placed in investments that allow for quick withdrawals and carry low risk.

 

– 50% in a High-Interest Savings Account or Fixed Deposit.

– 30% in Liquid Mutual Funds (yielding around 6-7% interest).

– 20% in cash or a bank account.

 

This strategy will help ensure Raj’s funds are secure and readily accessible when needed.