Change is the only permanent phenomenon in this world.
Some changes are worth remembering for lifetime.
Some leaves us with experiences for lifetime.
One such change is encounter with emergencies.
Emergencies are uninvited guests, they come anytime, and leaves us empty handed.
We can overcome those guests either by shutting the door, or by greeting them with grace.
One such uninvited guests is Financial Crisis, which can be greeted with grace through Emergency Fund.
Its well said that,
a friend in need is the friend in deed.
Emergency Fund is your best friend for all time needful times.
- 1 Why Emergency Fund?
- 2 What is Emergency Fund?
- 3 Size of Emergency Fund?
- 4 Building Emergency Fund: 8 Lifestyle Changes
- 5 Conclusion
Why Emergency Fund?
The topography of our country i.e. India, is quite unique where, there is flood in one part of country and drought in other part.
Earthquake, landslides and lightning makes newspaper headlines every now and then.
Metro cities are grappled with air, water and soil pollution to the extent that lung capacity of young kids is reducing, people don’t have access to drinking water.
More and more people are gripped by diseases. With untimely diagnostic, treatment is delayed, which increases the cost of treatment.
Adding to it is frequent layoffs from companies on name of restructuring, accidents and accidental deaths on roads, untimely deaths etc are increasing day by day.
Difficult times which dis-balances our emotional and financial stability can come with anyone.
Although we cannot always avoid these times, but we can prepare our self financially to face such time through proper financial planning and building an Emergency Fund.
What is Emergency Fund?
In simple terms,
Emergency Fund is the amount of money kept aside to meet any unplanned financial expenditure.
It offers a helping hand in case of job loss, switching the job, medical emergency, natural calamity or anything which we haven’t planned and predicted.
Emergency Fund is like call at 2:00AM friends, they are always there to help you out of any condition, similarly, its always kept nearby and quickly accessible place.
Whenever any emergency strikes, you are ready with to tackle it. Just like identity card you should always carry, emergency fund is sine qua non.
Prevalent Ready to Use Recipe in Emergencies
In absence of Emergency Fund if we encounter any emergency, we run door to door exploring one or more of the following options.
- Taking interest free debt from friends and relatives.
- Take interest laden debts from close ones.
- Getting Personal loan from banks.
- If, all that don’t works out then loans from non institutional financiers.
- Compromise on important things.
- Default your payments.
Result, emergency condition is avoided but, we are in a debts. While repaying those debts, we may find ourselves in debt trap. i.e. also a kind of Emergency situation.
Now, we have seen why and what of emergency funds, lets move on to how to create Emergency Fund.
Size of Emergency Fund?
There is no fixed recipe.
Just like different shades of green on leaves, there are different shades(amount) of Emergency Funds needed by everyone and every family.
But, there are certain general guideline to decide appropriate emergency fund size. i.e. neither too small nor too large.
Source of Income?
An employee of organised sector, have its Provident Fund (PF) deducted by employer. And PF is actually the last thing to withdraw in any situation. It’s the bail out account, and must be used at option of last resort only. So, in general, keeping 3 -6 months of expenditures as emergency fund is recommended.
Businesses are not evergreen. High’s and Low’s are part and parcel for them. To cope up during low days of business cycle, emergency fund equivalent to 1 year of expenses is preferred.
For startup or self employed people who are still waiting for revenue model to stabilize, a emergency fund of 24 months in preferred.
Number of Dependents:
Number of dependents and their age greatly affects the emergency fund corpus needed. For the breadwinner, the first thing is to have a term insurance for self and medical/health insurance for self and dependents.
For seniors or elderly a health insurance with critical illness insurance cover is also compulsory.
Without insurance, size of emergency corpus required will increase proportionally with increase in number of dependents and their health status. With deteriorating health emergency corpus needs to be increased.
In India, taking institutional loans is quite difficult. People in cities avoid it due to number of formalities, and villagers don’t have easy access to institutional loans. Whenever need arises, quick loans at higher interest rates are taken, and then repaying it becomes a big hurdle.
To overcome this situation, first create a small emergency fund may be of 1-2 months expenditure, then clear all the debts. Once cleared invest in emergency fund.
The small emergency fund in beginning, would help you to avoid debt trap. A situation where, old loans are cleared by taking new loans.
In general, an emergency fund formed by averaging the monthly and yearly expenditure for 6 months is considered good.
Now having learnt about what are emergencies, how people tackle them and how much emergency fund one should have.
We move on to how to create emergency fund.
Building Emergency Fund: 8 Lifestyle Changes
Rome wasn’t built in a day
Creating a corpus is a slow process. It may take year or so to create your emergency fund.
But, it’s useful. It’s our best friend for rainy days.
Here is the list of 8 Lifestyle changes to build Emergency:
Transfer all the extra cash lying at home or bank account to a online Fixed Deposit (FD). Don’t let extra money sit idle for you.
Write down all the expenses in a register or excel sheet. Just to be aware of where are you spending your money. Record all big and small expenses and prioritize the expenditure.
Keep a piggy bank at home. Drop all the changes, coins you get in it. Open it when it gets full, and transfer all its money into banks online FD.
Don’t illuminate the whole house until not required. You can cut bills by using LED bulbs and tube lights, using Air Conditioner and Geysers only when required. Diligent use of AC’s and Geysers can significantly reduce your electricity bill.
Avoid Credit/Debit Cards
While using credit or debit cards, we don’t get the feel how much money is spent on single transaction. Eg. try spending Rs 860 from credit/debit card and spend same amount in cash. Which will give you more feeling of money spent?
Avoid carrying Credit Cards:
By using credit cards we try to do expenditures based on our future income. We have to be disciplined while using credit cards. As your’s today’s expenditure is added to your debt for approx 50 days (max). Follow simple formula, if you have money, in your account, then only spend it, else wait till the time you accumulate the same.
Avoid vehicle for grocery store
Try walking or cycling to nearby grocery store instead of going by vehicle. Its helps in saving your fuel expenditure and country’s oil imports (although you wont realize it).
Medical expenses are the most critical expenses which you cannot avoid. The better way out it to walk, exercise and eat healthy food and stay fit. Thus reduce medical bills.
These are few ways where you can cut down your expenditure to create your emergency fund.
You can’t build a great building on a weak foundation. You must have a solid foundation if you’re going to have a strong superstructure.
Similarly, Strong Emergency Fund lays the strong foundation to build achievable superstructures of financial goals in life.