What is the 3-6-9 rule you can use to build your emergency fund? Here's how to calculate the savings goal…

Individuals looking to future-proof their finances against emergencies or expensive but unforeseen turn of events, must build an emergency “rainy-day” fund to protect their savings from sudden drain during extenuating circumstances. As to what constitutes an emergency, this could include any sudden and large costs such as a car repair or medical bill.

Experts note that sound financial planning includes provision for an emergency fund that can help tide over such sudden needs without straining your daily finances and while keeping your usual savings separate.

Today, we explain the 3-6-9 rule that salaried individuals and even those without stable income can use to build their savings for a rainy day or to safeguard against extenuating circumstances.

Emergency fund: The 3-6-9 rule explained

Average investors can follow a simple thumb rule to accumulate a fund to support emergency expenses. Clear Tax in a report suggests that those with regular income should aim to save at least three to six months’ worth of monthly expenses towards their emergency fund. It added that for those with unstable jobs or irregular income streams, the savings should inflate to cover 9-12 months of expenses as a buffer.

Simply, the 3-6-9 rule prescribes saving as follows:

• Save three months of expenses if you are single and earn a steady income,
• Save six months of expenses if you have dependents and earn a steady income,
• Save nine months of expenses if you are single and your income is irregular,
• And save 12 months of expenses if you have dependents and your income is irregular.

Those with irregular or unstable income include freelancers, individuals paid per project, etc. There is also consideration on the higher side for individuals with heavier financial responsibilities due to medical conditions, financial obligations etc.

Notably, the 3-6-9 rule is a general guideline, and the actual corpus may have to be adjusted based on your lifestyle and requirements. Further, it is best to reassess and calculate your monthly expenditure from time-to-time. This helps in case of changes due to credit or loans and must reflect in your emergency fund goals accordingly.

How to calculate emergency fund using 3-6-9 rule?

In order to calculate your minimum emergency fund amount, tax experts advise that individuals start by assessing their expenditure for a period of three to six months.

• Start by first list all your non-negotiable monthly expenses — This will include the food and groceries expenses, water and electricity bills, home loan, internet bill, EMI(s), insurance premiums, loan repayments, school fees, transportation expenses, and the likes.

• Next, multiply the total above in increments of three, six and nine (and 12 for those who need it) to calculate the target you need to achieve a good cushion of savings over the medium term.
• It is also important to periodically assess the math against your most recent expenses every few months to ensure that your emergency fund matches latest requirements.

Can start small, but build steady

Start with a target for three months and build more as you reach your goal. For example, if your monthly expense is ₹25,000 for six months that works out to ₹1.5 lakh as emergency fund. This can be built in stages, starting from ₹500-1,000 each month, or even a little more or less depending on your ability.

It is advisable to take stock of your expenses every few months to keep a track of how much you are spending and if the fund total meets calculations. The key is to be consistent and habitual.

A quick tip is to automate deductions for fixed deposits or SIPs (your choice of investment for emergency fund) and ensure that extra income such as bonuses, tax refunds, or cash from side-hustles are deposited directly to the emergency fund till you hit your goal amount.

How experts suggest you invest for emergency fund

Ideally, when it comes to emergency or rainy-day fund, you should stay away from investing in volatile assets such as penny stocks or risky equities, which can fluctuate significantly in the short term. While they may be high risk-high return options, these are not suitable for emergency purpose.

Clear Tax suggests splitting your investments across liquid and easily accessible options. It noted that 30-40% of the investment should be immediately accessible in instruments such as a savings account or bank fixed deposits (FDs). While 60-70% should be invested in low-risk debt options like liquid or overnight mutual funds for better returns without sacrificing safety. Here's a breakdown:

Disclaimer: This story is for educational purposes only. We advise investors to check with certified experts before making any investment decisions.