Everybody knows that emergency fund is absolutely necessary. Nobody likes to have unforeseen expenditure but we can never know when bad luck knocks at our door.could be in the form of medical emergency, a layoff, car repair, a close friend’s requirement
How do we park our money in emergency fund and what impact it can have in the long run !
Primary requirement of an emergency fund is liquidity i.e. money should be at our disposal. Secondary requirement is returns, higher the better.
I will do a comparative analysis of a person who uses a saving bank for parking money and other who uses P2P .
Lets say Mr X earns 1lakh per month and keeps an emergency fund of 4lakh in the saving account.basically out of the 5 lakh .1 Lakh is for immediate requirement like some medical issue etc( technically everybody should have a medical insurance also). The rest 4 lakh is for a scenario where if he loses a job he can still pay for bills,rent and emi etc.
Saving bank Performance
In 15 years at 5% return your emergency account will grow to 10.4 lakh. Hardly the amount that will cover you 15 years later.
So whats the alternative :P2P lending
But how do we use P2P lending to maintain liquidity
We can split the emergency fund into 2 parts:
1 part : current month liquidity
2 part: far month liquidity
So the 5 lakh will be divided into 1+4i.e 1 for this month and 4 for later
Basically 1 month backup is for immediate needs and later for other than that.
We put the 1 in saving bank and 4 in P2P platform.
The cashflow of the 4 lakh will look like.I have considered following assumption
6 months loans,20% interest rate 4 lakh capital
So every month we get back close to 71000.Now if things are going great we reinvest this ,otherwise we can draw it and get 71000 in 1 day. We have visibility of next few months so we can start or stop reinvesting accordingly.
Lets say that we do this for 15 years and luckily we dint need to use it How much would we have made doing this:
@ 15% cagr (considering some defaults) : 40.7 lakh
@20% cagr :77 Lakh
Isnt it wonderful that our emergency fund ends up as our best investment!
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