If you are still in doubt over saving an emergency fund for yourself or think that the fund you saved for an emergency is lying waste, you are surely mistaken. Let’s not go far away, Jet Airways was a household name for almost all economy flyers. What happened there? A lot of pilots and aircrews are stranded now. They have nowhere to go. Those who had a hint of the massacre beforehand switched to different airlines but still, plenty of them are now sitting back at home waiting for an opportunity to come up. There were a lot of them whose household ran on their income and now are finding it difficult to even pay the EMIs for their luxury bungalow or penthouse. Never had the company thought of such a day to come and nor did the staff members?
The worst part is neither was the company ready with an emergency fund to overcome such a situation and nor were the employees. Hence, the life which once was a source of envy is now a misery. Hence, an emergency fund is a must as there is no certainty in life, the least you can do is be prepared to deal with the lemons life throws at you.
How big should the emergency fund be?
The size of emergency funds varies with different people depending on various factors like size and type of family, income, fixed expenses, etc. ideally, an emergency fund must be equal to 6 months’ salary of an individual. To be specific, the living expenses for 6 months must be saved. Some theories also claim that along with 6 months salary, one should also save the amount equal to the last emergency they came across.
So, Emergency fund = 6 months living expenses + cost of the last emergency funded
How to deal with financially stressful times?
First of all, cut off all the unnecessary expenses like eating out, movies, shopping, hanging out at cafes ad coffee shops etc. this is called spending socially which is a 100% avoidable expense category.
While you plan your emergency fund, these expenses must not be included as they do not come under regular living expenses. The main focus should be on basic necessities and expenses like- food, housing cost, utilities etc.
The next thing to consider is if you have a debt overhead. If yes, try and include the cost of your debt EMI in the emergency fund. Also, if you are an investor and invest through the SIP method, try your level best to include the SIP amount in your emergency fund. That would be a wise decision but do not compensate over other basics for SIP.
List down your fixed expenses which can be anything like school fees, rent, cable tv, maid, electricity bill, water bill, phone bill, insurance premium etc. List each and everything and then sort. Larger the number of fixed expenses, the more you would need to save as an emergency fund. At the very least and frugal, you are bound to have a high grocery bill (necessity). Also, factor in a situation if during any global crises any of the earning members of your family lose their job.
Where should you save your emergency fund?
You should park your emergency fund in avenues that provide high liquidity. it can be a fixed deposit or a liquid fund or a combination of both. A lot of people prefer keeping their emergency fund as a saving in a bank account but that ways your money is stagnant. Keeping it under fixed deposit or liquid funds at least yields some returns. Another important factor that must be considered is that your emergency funds must be accessible to your spouse and children. This will come handy in times when you may be the victim and somebody else needs to withdraw the emergency fund.
Things to remember while allocating emergency funds
Never think about returns while saving emergency funds. the first and only objective that should be in your mind regarding emergency funds is the liquidity of those funds. The easy accessibility and safety of those funds must be the primary objective.
You are not required to build up your emergency fund in one go, this is a gradual process but a steady one. The sooner you save your emergency fund the faster you will be relieved of financial stress.
Do not depend on your credit card as a savior on a rainy day. Even if it saves you then, it is definitely going to come back; bigger! If due to any reason you fail to pay your credit bill by the due date, it is going to bite you back with a heavy load of interest.
Now that you have time, money and opportunity, save your emergency funds before it gets too late. Remember, problems do not knock before the shock, be prepared and fight back strong.