We are living in a world full of uncertainties. Who expected a pandemic like Corona attacking the world and making everything around go standstill? We are seeing unexpected salary cuts, job losses, businesses slowing down and also sudden medical expenses. Many of us might have thought the best way of managing finances is investing regularly in profit-generating or safe investments or having enough insurance protection. But, what about these uncertainties? Are we financially prepared to face them? If we are not, these can completely disturb our long term financial planning as we may be forced to rush for an immediate high-cost loan or break some investment which is linked to a financial goal.
What are the eventualities that we need to be prepared..
Situations like loss of employment, low income or no income for self-employed or people running small businesses, having to take a break from work due to health reasons. It might take a few weeks to months to find a new job or to work on business improvement or to recover from illness. Health-related expenses for self or family, in spite of having health insurance in place, there will be many out of pocket expenses that we may need to take care of. House repairs due to natural calamities, vehicle repairs and unplanned travel etc.
These are a few instances we are covering but there might be others too based on individual or family situations. Hence expecting these uncertainties and starting to build a contingency fund to financially sustain these without causing disturbances to long-term goals is very important.
What is the amount needed..
The ideal amount would be an amount covering six to eight months worth of living expenses that cover rent, utilities, groceries, medication costs, essentials, school fees, EMI’s, insurance policy premiums and any other expenses. The requirements can be customised based on your personal and family priorities.
How to accumulate
If you are just starting to accumulate this fund now, you will need to prioritise and set aside a minimum of three months expenses as soon as you can. Further, you can start adding a small amount regularly. You can think of using your bonus amount or some extra money you got from selling old and unused furniture or old vehicles.
Where to put this money
The very objective of having this fund is being able to access it immediately when needed. So, liquidity is a very important aspect to consider while deciding where to put this money. Some portion of this money can be parked in a savings bank account with a sweep in the facility. You can set a limit and if the amount in the savings account exceeds the limit it automatically gets transferred to fixed deposit.
The other major portion of this fund can be invested in liquid or ultra short term mutual funds through monthly SIP. These funds give better returns than a bank account or FD and allow you to withdraw the amount in a day. Some liquid funds are also providing ATM cards for immediate withdrawal.
Other important points
- The emergency fund is meant to be used only for emergency purposes and not for wants like a vacation or buying a high-end mobile etc.
- If you happen to use the emergency fund anytime, you must make sure to replenish it to the required level again.