1. Emergency fund ratio or liquidity ratio is a personal finance ratio that measures the ability of a household to meet expenses out of the assets that can be easily converted into cash.
2. It is computed by dividing the total liquid assets of the household by the total monthly expenses of the household.
3. The ratio measures the preparedness of the household to manage a situation of loss in income.
4. Around six months’ worth of routine expenses and a year’s worth of fixed expenses should be kept in an emergency fund.
5. Actual number applicable to any household will depend upon the number of earning members, stability of income and ability to raise easy credit.
(Content on this page is courtesy Centre for Investment Education and Learning (CIEL). Contributions by Girija Gadre, Arti Bhargava and Labdhi Mehta.)
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