emergency fund ratio calculation
Hey Qasim, there is actually a formula I use to calculate emergency fund ratio. It is:
Emergency Fund Ratio = Total Liquid Assets ÷ Total Monthly Expenses
For instance, if you have ₹3,00,000 in liquid savings and spend ₹50,000 every month, your emergency fund ratio is 6.
That means your savings can sustain you for 6 months even if your income pauses.
Think of the Emergency Fund Ratio as your personal financial safety score.
Also known as the liquidity ratio, it helps you see how strong your safety cushion really is. The idea is simple: the higher your ratio, the better prepared you are for life’s surprises.
Here is what you must remember:
- Ideal Range: Aim for at least 6 months of living costs and up to a year of fixed expenses.
- It Varies: The ratio depends on income stability, number of dependents and how easily you can access credit.
- Count Only Liquid Assets: Savings accounts, short-term FDs, liquid mutual funds or anything you can quickly turn into cash.
A strong emergency fund ratio means financial calm, not chaos when life takes an unexpected turn.