Why You Need an Emergency Fund ?

Pankaj(35) a  manager in a reputed BPO firm had been informed by his office colleague that investment in land was one of the best things to do for earning higher returns. After considering a proposal which came his way, Pankaj purchased half an acre of agricultural land for sum of 6 lakhs in coastal Maharashtra. For this purpose he utilized his fixed deposits and savings account balance. The shortfall of Rs 2 lakhs was raised from a personal loan. Pankaj was extremely happy as he felt he had made one of the smartest decisions in his life and created an asset apart from his self occupied property, which also was on loan. A few months later came the news that the company was not doing well and was in the process of closing a few of their processes which included Pankaj’s. Having worked for only a year in this company, Pankaj didn’t get anything except 2 months’ salary as notice period and was immediately laid off. Pankaj started applying for a job but it took him nearly 6 months to get one. During this period, Pankaj found it difficult to manage his home expenses and loan payments. Finally in the 5th month he sold the land that he had purchased for the same amount and cleared off his personal loan

Can you avoid getting into such a situation: Job layoffs, sudden illness of self or dependent parents or accidental hospitalisation are events on which we do not have any control? No one can predict the timing or frequency of such events but at least we can be prepared for it. Why does it normally happen that even though we know the monsoon is round the corner, most still purchase the umbrella only after the first showers and after having got wet a couple of times. Getting wet may not be as much depressing as the events mentioned above. A sudden illness, especially if you are not even covered by a medical cover can upset your entire financial life if it turns out to be a major illness or surgery.

emergency fund

How can I be prepared: Firstly one needs to check if the basic insurance’s are in place or not. Evaluate your needs with the help of an expert and cover yourself for untimely death, disability and illness which can be done by purchasing life insurance, Personal accident and mediclaim policies. This is the first level of protection that you need to do. But there could be events which may or may not be covered by the insurance policies that you have bought.  For example, in case of job loss you might not get any unemployment compensation. In case if your parents are senior citizens with pre-existing illnesses, chances are that even they might not be covered by any medical insurance.

Any Thumb rules which we can follow: Ideally if you have a stable job along with a working spouse, try to maintain 3 – 6 months of your monthly expense in liquid form. Liquid form means that you could convert it to cash, at short notice. An emergency fund can help you take care of those smaller and bigger sudden expenses such as un-insurable auto repairs, replacing dysfunctional electronic items, uninsurable illnesses etc. It can also come in handy where, at times, your cashless mediclaim might not get approved and you need to pay upfront cash and claim later. Six months contingency fund is usually suggested for covering extreme situations such as a job loss where it might take that much time for getting a new job and during which you need to still pay your mortgage or insurance payments. In case you have dependent parents either senior citizen or not, but not insurable by any medical coverage, then you need to keep a higher amount.

How should we maintain this emergency fund?

For a contingency fund equal to 3 months of your monthly expense, it is suggested to maintain the same in your savings account which has an ATM card so you have the convenience of withdrawing it at any point of time. Nowadays banks provide you a Flexi-Fd facility where deposits above Rs 10000 is automatically converted into fixed deposits and are also liquid, in the sense you can withdraw it using your ATM card and still get FD interest for the period it was maintained. Anything over 3 months can be maintained in a liquid fund offered by mutual fund companies as they offer better returns than savings account. The redeemed money also gets credited the next day into your bank account. Some mutual funds are also offering ATM cards along with the liquid fund schemes which makes it that much more convenient and hassle free.

For those who don’t have enough savings to maintain an emergency fund, it is suggested that you start a recurring deposit to build one. If you are planning to build an emergency fund of say Rs 1 lakh, then look at your surplus that you generate every month and depending on that allocate a part of the surplus to this RD so that you have your emergency fund ready in a few months.

Remember- don’t commit any money to long-term investments unless you have made provisions for your emergency fund. This will ensure that you are prepared and would provide peace of mind which we all need in today’s uncertain times.