Life is unpredictable.

Your life is smoothly going on – everyday you go to work, come home and get a nice salary in the bank every month. One fine day, you lose your job, meet with an accident or someone in the family falls sick suddenly. You need a couple of months or maybe more to bring your life on track. If its you that Lady Luck has chosen to turn away from, what happens to the mortgage payments? Who will put food on the table?

The older generation has the solution – rainy day money. Or, in more fashionable terms, emergency funds. This money that you squirrel away in small amounts in a separate savings account that frees you from the temptation to use it.

How much should I set aside for emergency?

Sorry for not being able to give a definite answer, but I have to tell you, "It depends."

You have to assess your risks and dependencies to arrive at a figure. If you have a partner who also works and earns, this could be smaller, but if you are the sole breadwinner for a large family (with kids), you might want to look at a larger amount.

Any Rules of Thumb?

The usual notion is 6 months of your monthly expenses (including mortgage payments etc). Start small, say 1 month, and put some every month. You could also put a part of any surplus money you get into it. A friend of mine has a hobby that he works on the weekends. Selling what he creates as a hobby has given him a small "side income" that he uses partly for emergency funds and partly for splurging!

I plan to keep aside 2.5%-5% of my monthly salary into a separate account. My financial planning was non-existent earlier and bringing it on track has exhausted my finances, especially since we bought a house on mortgage recently. This is one area where I have not made progress.

Resist the temptation to invest

While most financial advisors agree with emergency funds, some may say it is opportunity lost in earning more. Beware and remember that this fund is meant for easy liquidity. Investing it into stocks or mutual funds locks you into a long-term commitment and defeats the purpose.

Do not go overboard either, by keeping too much of money here. Saving is easy; finding the right balance and sticking to it is the hard part.

Once when I was playing Monopoly or Business (or whatever you call the game where you buy places and build houses), my friend used to put away a few bucks under his seat when no one was looking! I now know he was planning for emergencies.

Do you have any experiences where you or people known to you have secret places to store some money away? [Moms storing cash in kitchen stores come to mind :) ]