Planning your financial life does not mean planning for your long term financial needs only, It will be incomplete unless you keep an emergency fund for the unexpected emergency situations.
In this article i will tell you why it is important to keep emergency fund and how much of this fund you should keep aside.
What is Emergency fund?
Emergency fund is the money that you should keep aside, so that you can use it in case you meet up with some sudden financial surprises, for example –
- Unexpected medical expenses
- Job loss
- Vehicle repair or home decor
- Helping someone close in his need
- Unplanned traveling or entertainment expenses
- Any financial crisis etc.
Emergency funds are not to satisfy the daily expenses and basic needs, it is a support that you will have when you really need it in your hard time.
Why is is essential to have an emergency fund?
Having an emergency corpus must be the priority for everyone while planning for a great financial life. Let’s see some of the impacts of having emergency fund on your personal and financial life.
1. Helps you to keep your stress level low
When your know that you have an emergency fund, you can live a stress-free and relaxed life. Because you know that you have a backup plan and so if any emergency pop-ups you are already ready to face it.
2. No need to take an emergency loan
Taking a loan or asking for money in your hard time can sometime hurts your pride. Having an Emergency fund will be helpful not only to solve the problem but it also protects your self-esteem.
3. Don’t have to redeem from your future savings
Your savings are related to some very important future goals of yours. Contingency fund will help you to protect those dreams of yours by satisfying your today’s emergency need.
4. No need to cut your essential expenses –
It happens with most of the people, they have to sacrifice their expenses though they are important, to collect money for their unplanned or emergency expenses. Having an emergency will be a helpful hand in those difficult times of yours.
Why it makes sense to have an Emergency fund?
With the global slowdown, there are many cases of unexpected job losses in the field of Finance, IT, Manufacturing and many others. You never know when you will be without job.
Lets take two scenario when you loose your job and you either had Contingency funds and you did not, Let us see what happens in these two cases.
Case 1: You do not have contingency Funds: Put yourself in this Situation, Close your eyes and try to think about this situation, How do you feel?
Your Family depends on you, all your family expenses are met with you salary, now you loose your job!! What if you don’t find another job soon? In this situation you have a heavy pressure on you to anyhow find a new job as soon as possible, You need a JOB !! and not a “good” or “appropriate” or “Dream” JOB.
If you find a job, but you don’t like it or wanted to do it .. still you will have to take it because of the pressure of “finding a JOB because of others depending on you” …
You compromise on Salary, Company and your wishes. Why does this happen? This happens because you cant wait, because you don’t have the to survive of another 1-2-3 months. You know that you can wait a little more and find a good job suitable for you, but you cant wait.
Case 2: You have Sufficient Contingency Funds: This case is just the opposite of what we discussed above. When you have sufficient CF, you have a relief in mind that you have sufficient time to find a good job without compromising your family needs.
You don’t feel the pressure to get the job ASAP. Though you have to find a good job soon, its not necessary that you take any shitty job which comes your way …
See this Video too …
How to start saving for Emergency fund?
1. Pre-decide your monthly expenses –
Plan your monthly expenses. Try to control your expenses as much as possible, so that you can save money to invest in your emergency fund. Today’s unnecessary expenses can have a bad impact on your savings for your contingency fund.
2. Set an auto deduction towards emergency fund –
When you set an auto-deduction for your emergency fund at the start of the month, you will not have any regret at the end of the month for not saving anything for your unexpected emergencies.
3. Don’t touch the emergency fund for quick needs or smaller crisis –
Lot of people do this mistake, they use their emergency corpus for the some very small emergencies which they can handle with their routine expenses also. You should criticize the situation and
4. Save for emergency before investing in long term goals –
You long term investments are related to your specific goals. So it is obvious that you have as emotional attachment with those investment and you don’t want to touch that money for any other purpose. If you have an emergency fund, then you don’t need to use the money you have invested for your future dreams.
Besides, some long term investment have lock-in period, so if you want to redeem your money before completing the maturity time period, you will have to pay some penalty charge.
Where to have Contingency funds?
As per the name, it can be seen that this amount is required at the time of unforeseen situation which can happen anytime,so it must be parked at some liquid avenue like Bank account or Liquid funds.
If you are keeping 4 months of funds as CF, then you can keep 1 month money in Cash and rest 3 months money in Liquid funds.
Summary: Contingency Funds are the part of Risk management. And risk management is something no one should avoid. People realize its importance only when they plan for it and get trapped in a situation which demands Contingency funds. ..
So now its your turn. Plan for it, be ready for unplanned emergency, and secure your future.
What do you feel after reading this article? Do you agree with this?
do let us know what do you think about the concept of emergency fund and also your view on this article in our comment section.