What if you lost your job or got injured? How would it affect you financially? ‘Emergency funds’, well the word says it all. It’s a fund used to meet your emergency needs. Many people do not know the meaning of emergency funds. They do not realize the importance of having one. Emergency funds are kept so that when an unplanned event occurs, there are funds available to pay for those expenses. The good thing about an emergency fund and the main reason for keeping an emergency fund is that you do not have to touch the other money that is kept aside to fund another goal.
The coronavirus pandemic brought forth the necessity of having an emergency fund. During this uncertain time, people who have an emergency corpus are better off than the ones who don’t have anything kept aside for funding emergencies.
Let’s take an example,
Mr. Chetan is a 34-year-old man. He stays with his wife, Neelam, who is 32 years old and two children, Priya and Riya aged 12 and 14. Both Chetan and Neelam are working at very high posts in 2 different companies. He has planned his finances in such a way, that he has enough funds to meet his financial goals for his family, but he has not kept aside any emergency funds, thinking he won’t need it, since he has the finances for all his goals. Due to the recession, Neelam loses her job. Now the whole family is in a financial crisis because now there won’t be any income from Neelam’s side. So now Chetan has to use the funds from other goals, which is going to compromise his family’s future.
On the other hand, if they would have kept an emergency fund aside, then Neelam’s job loss would not have an adverse effect on the family’s financial stability. They could have comfortably continued with their expenses by utilising the money kept aside for such uncertain circumstances till Neelam gets a new job. Also, the family’s other goals will not be compromised.
It is said that your emergency fund should consist of at least 6 months of your salary. These funds will help you get back on your feet in case you lose your job. As we have already seen in the above example, how one’s goals can be compromised. It changes the whole financial situation of the family. The family will have to bear the costs, for the mistake of not having an emergency fund. Your emergency fund should be invested in liquid funds because you don’t know when the emergency can occur, so liquid funds would be the best suited investment avenue for your emergency fund.
We have already seen above, how the emergency fund comes into use, when a person loses their job. Let us see some other situations where the emergency fund may come in use.
Also read: How Mr. Sharma Plan his Retirement? COVID-19 Impact On Your Retirement Planning?
Death
In case an unfortunate situation occurs, and it leads to death, there will be certain expenses, which the family will have to bear. These expenses can come out of the emergency fund, this way the other finances remained untouched. Some people might think that we have insurance, so why keep an emergency fund. Having insurance definitely helps but your family will not get the claim amount immediately. It takes some time. So, this fund will be useful for immediate needs till the insurance claim amount is credited.
Diseases
In case one of the family members are diagnosed with a critical disease, then the treatment expenses along with hospitalization expenses and medicines will cost a bomb. Again here one can say that we have medical insurance, but what if that is not enough? There are certain exclusions in every health insurance policy. What if the claim is not approved by the insurance company. Health Insurance policies provide you with financial assistance. But having an emergency fund will take care of other risks. So there’s no harm in keeping back up funds. If your medical policy takes care of all the expenses, then that’s great. The emergency fund can be used for something else.
Accidents
If any member of the family meets with an accident, here again expenses will occur, depending on how bad the injury is. There are yet again accidental insurance policies. These policies may not be able to cover the whole bill. That’s where your emergency fund will rescue you financially.
Natural calamities
This is one event no one can predict. An emergency fund will be of most use in times like this. It is so difficult to gain back everything lost from a natural disaster. You might not be able to bring back each and everything that you’ve lost, but having your emergency fund will help you make up for most of the loss. This way the family doesn’t have to suffer much, of course the emotional loss is priceless, but at least they don’t have to start from scratch.
As we have seen above, there are many situations, where one would need an emergency fund. There’s no harm in keeping aside a certain sum of money for uncertainties. There could be other expenses which can unexpectedly occur and we may not have considered it. Keeping an emergency fund will help you to not withdraw from other investments which are meant for other crucial goals like retirement or children’s education. Emergency funds are not only for a specific emergency, they can be used for any unforeseen event. So It’s better to be safe than sorry.
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