The pandemic turned emergency funds into a hot topic in money management. The mass impact on personal finances inspired a thought process, which recession and unemployment could not.
WHAT IS AN EMERGENCY FUND?
An emergency fund is a certain amount put aside in assets which can be liquidated, to take care of your personal maintenance for at least 3-6 months. Well, the period is debatable, as people suggest figures from 3 to 12 months.
And how much to put aside is another debatable topic. Do you take an amount equal to your current monthly expenses, or a smaller one? Fixed costs will remain, but we can cut down on wants or lifestyle expenses or discretionary costs (whatever you choose to call it) for sure, in times considered to be emergency.
Does it look less scary now?
WHAT PREVENTS CREATION OF AN EMERGENCY FUND?
Are emergency funds necessary? The need for it looks remote, like insurance. You are reluctant to block funds for something we see as not necessary.
Your business or career is going fine. You have money stashed away for long-term goals, and adequate health insurance. What do you need to worry about?
And you’d rather spend that money on an annual holiday or diamonds for the upcoming grand celebration.
Wait a minute, let’s make the task easier.
Break it up into chunks
- It’s not necessary to always cut short on expenses or other savings goals.
- Your incentives, increments and bonus can contribute to the emergency fund, till you reach the desired amount. Mark my words, only till you reach the desired number. After that, it’s all yours.
- Check the cash backs and money-saving reward points on your cards. Put away the amount.
- Cash gifts received from friends and family can go in the kitty. You can ask your kids to do the same.
- It’s a good idea to moonlight once in a while and earn extra money.
- Do you have a coin jar in the house? Count the cash every month and put it in your fund.
- If you eat out or watch a movie every weekend, make it every fortnight.
- Dividends earned from stock investments are sporadic. Put those aside.
- If car-pooling is possible, save some money on commuting and remember to put it aside.
- Can you downgrade your travel once in a while to save a chunk? Book flight tickets well in advance to save on astronomical last-minute prices.
I’m sure you get a hang of this. The idea is to be conscious of the amount saved, and to include it in the emergency fund. You will reach your goals soon enough.
CAN EMERGENCY FUNDS BE INVESTED?
The first suggestions that crop up are a savings account, a flexi-deposit account or liquid funds. And it seems like such a waste to keep money in asset classes with low returns.
Well, you don’t really have to….
It is okay to have one month’s expenses in savings accounts or liquid funds. 30 days are long enough to work at extracting money from other places like mutual funds, direct equity or gold. Obviously, real estate is not an option.
Go with your instincts or preferences. If you find it hard to sell or pledge gold emotionally, keep the funds in direct equity.
WHEN SHOULD YOU START AN EMERGENCY FUND?
The answer is – immediately, if you already don’t have one. It will prevent a lot of loss or eating away into investments for long-term goals at a later stage.
WHAT CAN EMERGENCY FUND DO?
- Pay medical bills not covered by health insurance.
- Help you float by when an existing source of income fails.
- Replace gadgets or a vehicle when they fail unexpectedly
- Help you return favours without straining monthly budgets
- Take care of gifting expenses on special occasions
- Acts as a saviour when your child throws a tantrum for something, and you can’t say No
- Entertain houseguests who drop in unexpectedly with huge expectations
- Take that weekend trip, or buy an occasional gift for someone you love.
- When a deal looks promising, but you don’t have money to invest.
WHAT CARE NEEDS TO BE EXERCISED?
- Replace the amount that you use up, in a systematic manner.
- Do not let funds lie idle in form of cash
Download the book 7 Money Lessons from the Pandemic here.