Life is full of ups and downs. It is so very unpredictable. We get to see that grounded Jet Airways has led to around 20,000 job losses, according to reports. Therefore each of these employees would have a story to share – of aspirations and goals which were not fulfilled due to lack of income, of home loan equated monthly instalment (EMI) missed and cancelled vacations and forced delay in healthcare expenses.
It is true that the trauma arising out of it cannot be avoided but the monetary impact can be minimised if one has adequate emergency fund in place.
The basics of financial planning advice that starting one’s financial journey by addressing ‘protection’ needs. With addition to adequate insurance coverage, one needs to build an emergency fund. MoneyMindz.com, India’s First Online Financial Advisory Portal certified financial planner suggests that one should keep aside a sum equal to your six month’s expenses, at least. It should also include sums targeted towards EMI payment.
If a person has monthly expense of Rs 30,000 and he has an EMI of Rs 10,000 per month, then he should keep aside Rs 2.4 lakh minimum. Basically, the idea is to overcome a situation such as job loss, accident which would lead to loss of income. If any such of risk materialises, then you will be in a position to pay for your routine expenses.
Let’s take one example, if one meets with an accident and is hospitalised, his hospitalisation bills will be paid by insurer if he has adequate coverage. But the question is who will pay for his other expenses? Therefore the household expenses and EMIs do not disappear just because of hospitalisation. If one has an emergency fund in place then he can tide over such a situation without suffering much in monetary terms.
To ascertain the right size of the emergency fund you should be assessing your situation. If you find hat six months are enough to get a new job with similar salary, in case you lose your existing job, then an emergency fund worth six months of expenses is enough.
As one rise in career the chances of getting a new job with similar payout decreases generally. Let’s us consider if you are higher up in an organisation’s hierarchy or in a specialist role, which is difficult to land into with other employer, better keep a bigger emergency fund. In such type of situations, in order to ensure peace of mind, one may want to keep up to three years’ expenses in an emergency fund.
The fact is that the idea of the emergency fund necessitates that you keep it in such avenues that it should be available when you need it. Liquid funds and bank fixed deposits are the best options to keep the money aside. Even though they do not offer top of the chart returns, they are liquid in nature and your capital is not at risk, in most situations.
For people in high tax brackets they may choose to park their money in a combination of liquid funds and bank fixed deposits. So, depending on your liquidity needs and the absolute size of the emergency needs, you may want to allocate larger share of your emergency fund to liquid funds. If you do not hold an emergency fund in place, consider a recurring fixed deposit or a systematic investment plan into a liquid fund.
Therefore emergency fund thus built is the first step in the direction of achieving financial freedom. Building f such an emergency corpus ensures that in case of an emergency, you do not touch your core portfolio and achieve your financial goals as per the original timeline.
You also need to remember that creation of emergency fund does not end the risk management process. Thus you have to keep reviewing your emergency fund the way you are expected to review your financial plan.
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