An emergency is not just a critical medical condition.
Covid-19 has shown different pictures of emergency situations. People actually became wise with their financial priorities.
#1. Job loss / Business failure
Job is never a safe option. You never know when your employer asks you to leave. Like what happened with Jet Airways staff, they lost their jobs even before the Covid crisis happened.
The COVID -19 forced many small businesses to shut down. I don’t have to say anything more here, you can go to the market and see yourself how many shops are getting vacant.
#2. Loss of money in scams, alimony
You may lose money in a scam even when you did not sign up for a ‘Quick Rich’ scheme. Banking & Credit Card frauds are now common.
Legitimate looking companies and banks like YesBank & PMC were involved in frauds.
That’s unfortunate if someone has to face a divorce, but I have to mention that people lose more than half of their money in alimony cases.
#3. Loss of property due
You don’t have control over the ‘Act of God’ – that is the word used for financial losses due to earthquakes, floods and wildfire.
Read online how much people lost in California Fire and Assam/Kerala Floods.
We can’t assume that we are immune.
We can also lose our assets in accidents and riots.
Read about the property loss in the recent Delhi Riots and when bhakts of Baba Ram Rahim torched the beautiful city Panchkula in 2017.
Building an emergency fund helps to tide situations of;
- Loss of primary income
- Unexpected loss due to self mistake
- Loss of property due to mistake of others
Did you ever calculate how many months can you survive without your primary income?
Calculating Emergency Fund
Your emergency fund should be 10x to 12x of the unavoidable monthly expenses.
One year would be sufficient to search for a new job, re-establish your business or find a new source of income like freelancing work.
For example, if you have Rs. 50,000 of the unavoidable expenses then the emergency fund should be of Rs. 5 to 6 Lakh.
But, in situations like COVID-19 where there is a lot of uncertainty, you need to have 15x of the unavoidable monthly expenses. The real financial impact of Covid-19 would be visible in 2021, let’s be prepared for that.
Having an extra 5X in a crisis situation will give you more time to meet your unavoidable expenses.
Where to Invest Emergency Fund
Don’t keep your emergency fund in the share market & real estate.
Keep your money safe – like in Fixed Deposits with Government-owned banks or post offices.
The other option is liquid mutual funds that invest majorly in debt and government securities, T-bills and high rated (AAA rated) CPs and certificates of deposits.
Liquid mutual funds offer an instant withdrawal facility for Rs. 50,000 and one-day processing in case of redemption for large amounts.
Additionally, liquid mutual funds offer better returns (5% to 6.5%) as compared to savings bank accounts that offer 3.5% interest.
Now it’s your turn.
Assignment – Calculating your emergency fund amount & how much funds you have to start building your emergency fund?