The one thing we can all be sure about life is to expect the
unexpected. And the best you can do is be prepared for those unexpected
emergencies. Continuing my last article, let us talk about financial
emergencies.
How does a financial emergency arise?
Financial emergencies can come in the form of a job loss,
significant medical expenses, home or auto repairs or something you’ve never
dreamed of. The last thing you want to do is be forced to rely on credit cards
or a loan which could simply compound the problem.
How to protect ourselves from such emergencies?
The answer is simple. Create an emergency fund.
What is an emergency fund?
In simple words, emergency fund is the amount set aside to
meet all your financial requirements during emergencies.
Where is your current status of emergency fund?
As far as my experience goes, most of you working people are
not setting aside money in a systematic manner. Hence, most of your salaries
would be lying idle in your savings account or fixed deposits at the max. This
means you’ve already created your emergency fund. Congratulations!
How much is enough?
The rule of thumb is to park your 3-6 months of your salary.
And if the number of dependents are more, park more than 6 months of your
salary according to your requirements.
Where should you park the money?
Emergency funds should be easily accessible and be easy to
withdraw. Hence, it should be maintained in cash or cash equivalent form which
could be in the form of Fixed deposits or in a liquid fund account in mutual
funds. Savings account is not advisable since the amount of interest rate is
low.
How to create?
Once you have decided on the amount, do not try and save
everything in one month. Do it gradually. Start saving monthly. You could park
it in savings account or in a recurring deposit to meet your required emergency
fund. Recurring deposit is advisable for greater returns.
Final words
The best way to maintain a healthy emergency fund is not to
touch it until you have an emergency. Don't withdraw cash from your emergency
account to fund your unnecessary expenses or for buying something which you
like. Never allow your instant gratification instincts to play a part in
withdrawing from your emergency fund you accumulated over the years. If you
have any major expense, see if you can postpone it to the next month rather
than funding it with your money set aside for emergencies.
Further, Monitor your budget periodically and make sure that
your emergency fund is always at the optimal levels. Whenever there is a change
in your financial situation, make sure you revisit your emergency fund
requirements and make the required changes. This helps in maintaining a healthy
fund to counter unnecessary debts during emergencies.
Feel free to ask any questions. I would be glad to answer.
Cheers!
