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Emergency Fund And It’s Importance

Importance of having emergency fund

What is An Emergency Fund?

It’s been almost a year, The COVID-19 has bought this world on its knees. Many people have come to the realization that most of us don’t have enough money to survive a sudden job loss. or prolonged sickness. We are talking about a global pandemic. This pandemic has caused massive job losses, due to reduced demands in cities across the globe thanks to lockdown.

According to GOBankingRates’ 2019 savings survey. The poll, released December 16, revealed 69% of Americans Have Less Than $1,000 in Saving.

Too many people who have been in the industry for so long have realized that their jobs are no longer stable and they can get fired at any time. Sudden job loss hurts even more if you are not already prepared for it. Most of the people don’t have an emergency fund to fall back on while your salary has stopped crediting.

Important Points to Remember

  • An emergency fund is a money kept aside for rainy days, be it a sudden job loss or any mishap or unforeseen expense.
  • Financial experts suggest having a minimum of 6-12 months of expenses including your EMI if any.
  • Safely of capital is most important, return expectation should be minimal from emergency fund corpus.

How Much for Emergency Fund?

Its boils down to your situations. It depends upon lots of factors including your salary, number of dependents ,any running loans etc. etc. If you have a stable household and stable income, you don’t need much emergency savings. I

If you’re single and don’t have any dependent or you are part of a double income household, three months of living expenses will be more than enough. if you are a single income or your job is not very stable or you have someone with serious illness to take care of. You should be targeting at least 6-12 months of living expenses including your EMIs. Job loss in your case would impact your ability to survive.

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If you don’t have your contingency fund set up yet and planning to start your investment journey. I would strongly advise you to first focus on setting up the emergency savings fund.You have to first figure out what are your essential and non-essential expenses and how much percentage of your monthly salary is used in essential expenses. Your essential expenses are you bare minimums, required to live your life and these can be further subdivided into two categories:-

Fixed expenses: monthly rest, utility bills, your insurance premiums, internet and phone expenses, any car/personal/consumer loans EMI, school fees or anything you need to live your day-to-day life without getting impacted.

Variable expense: These would be your grocery bills, gym memberships, subscription to Netflix, Hulu, travel expenses and whatnot.

emergency fund sample
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Where Should I Invest My Emergency Fund

This is one area where people screw upmost. Even after creating emergency savings, they try to maximize the return expected on it and end up investing in places where they shouldn’t. Before trying to invest your contingency money , you must check if your investment will be secure, quickly accessible and liquid enough or not?

Security: This money is to help you in case of unexpected situations. You can’t just invest it in an equity mutual fund or any other risky investment options, where you can lose a big portion of your initial amount in short term. Even long term debt funds/gilt funds are also not suitable for this purpose.

Accessibility: Focus on the word “Emergency”, none of the emergency will come at a pre-defined time. You have to make sure that this money is easily accessible. If you can’t withdraw it at any moment, there is no point in having it in the first place.

Liquid: I can’t stress this enough, Your provident fund/401K is not, long term fixed deposit or bonds are not liquid assets and therefore can’t be considered as an emergency fund. This is because you can’t just convert it to cash quickly.

I would suggest you keep it in a saving or checking account where you can withdraw it at any moment. It’s not to spend on holiday shopping because it’s available and the holiday is not emergencies.

When Should You Use Your Emergency Fund

Every time you think about tapping into your emergency money, you should be asking yourself a few very important questions. This is because if you don’t understand the word emergency. it will become another account for you from which you keep on withdrawing money as n when required.

  • Have you lost your job and don’t have any income to survive?
  • Is the expenses are supercritical and you can’t survive without it?
  • Are there sudden medical expenses that are not covered by your medical insurance?

If the answer is yes, you can tap into your emergency fund. always remember to replenish it once you recover from the temporary setback.

How to Setup Emergency Fund

“Rome wasn’t built in a day” if don’t have anything saved yet, it’s very hard to do it within the first month itself. The good thing is, it’s never too late and you can get started. but it is easier said than done, once you used to a certain kind of lifestyle it is very difficult to cutback. In the current economic conditions, where job cuts are real and can happen anytime. you have to take a few decisions which might help in tougher times.

One of the easiest ways is to sell stuff. Do you own two cars and manage with only one? Go sell that car, check-out your garage or storeroom. you will definitely find stuff which is collecting dust and you should be selling it. You can look for a way to cut-down your utility, grocery expenses, rent or you can take up part-time work, It’s up to you.

1. Set Aside a Certain Sum Every Month From Your Salary

For this method to work, first, you need to figure out what are your monthly expenses. You also need to know much you can save from your salary each month. The best way is to transfer a certain amount as soon as you get your salary into a different account. Check-out 10 different ways of saving money in your day-to-day life, if you are having trouble saving money.

Check-out 10 different ways of saving money in your day-to-day life,if you are having trouble saving money.

2. Whenever You Get Extra Money

This will cover your bonus, tax refund or any other amount of money you run into. Instead of spending it all because you wanted to treat yourself and its extra money after all. you should transfer it to your emergency saving account.

3. Save the Change

Whenever you get a $1 or $2 bill after spending you $20-50, you should save that amount. At every month’s end move this to your emergency saving account until you reach your target.

Frequently Asked Questions

Q. Where should I invest my emergency money?

The primary goal of the emergency fund is not to provide capital appreciation. You should think about the safety and accessibility of the emergency amount, rather than returns.

Q. When should I use my emergency saving fund?

You should use this money only in case of emergencies 1. Jobloss 2. Unexpected and unavoidable expenses 3. medical cost not covered under insurance.

Q. Can 401K/provident fund used as emergency saving fund?

Your 401K/Provident fund can not be withdrawn at any moment. It can not be used as emergency fund.

Q. How much emergency saving fund is enough?

It depends on your situation , however as a rule of thumb, you should strive for at least 6 months of your expenses including EMIs.

Q Which is the best bank to keep my emergency saving fund?

As explained earlier, safety of money is most important , always go with the big banks,If possible keep it in state run organizations.

Q. When to start saving for the emergency fund?

As soon as someone starts earning. An emergency fund is the first milestone before you start your investment journey in stocks and other volatile assets. A sudden crash can decrease the value of your investments by 20-30% as Covid-19 did it in early March 2020 and If you have to use your investment portfolio as an emergency fund, you could have suffered a major loss.

There alway’s something coming in a few month that will cost money. So always prepare in advance!!

rachel cruze

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