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The Importance of an Emergency Fund in COVID19 Era-Part 1

Mayur Pirgal & Kanchan Dwivedi

Do you have an Emergency Fund today? If yes, we are happy for you. But, if your answer is no, then this article will be especially useful to you.

If there is anything that COVID19 onslaught has taught us, it is that life can take unexpected turns with serious implications for our life & business, without any warning. We have learnt that, we cannot predict when and how situations change for the worse. However, we can certainly plan for such an expected or unexpected unforeseen situation.

One of the ways, Millennials can effectively deal with such unplanned situations is by having an Emergency Fund.

We are covering the following in Part 1 of our Two- Part article:-

  1. What is an Emergency Fund?

  2. Why should you save for an Emergency Fund?

  3. How much money should you allocate for an Emergency Fund ?

Design Credit:

1. What is an Emergency Fund? An Emergency Fund is that sum of money, which is set aside to cover large and especially unforeseen expenses or situations like:-

  • Medical Emergency

  • Job Loss

  • Salary Loss

  • Pay Cut

  • Loss of Phone or Laptop

  • Home Appliance Repair or Purchase

  • Major Car or Motorcycle Repair

  • Thefts

  • Wars

  • Floods, Fires or Natural Calamities

  • Accidents or Disability

  • Global Pandemic like Corona Virus outbreak that affects the economy, business & society, at large.

In cases like above, when suddenly the source of income dries up, it is stabilizing to have an emergency fund, a sort of a backup that helps to ride over uncertain times.

2. Why should you save for an Emergency Fund?

An emergency fund is an important part of financial planning for the following reasons:-

  • Ensures a Breathing Space for Millennials- Before Corona struck, it was not uncommon to hear of frequent job-hopping by Millennials. To upgrade their skills in-between-jobs, millennials would sometimes take up full-time courses. And , these days, it is common to read about Company Lay-Offs due to the lull in the economy. Now, an emergency fund, in both such cases, would give the employee ample time to search for a new and/or better job.

  • Peace of Mind- When folks are able to sustain themselves for the in-between-job duration in a comfortable manner, it brings peace of mind to them. Stressful situations and panicked/ rash/ pressured decision making, can thus be avoided.

  • Avoid the Debt- Trap- Sometimes, when the person has taken a loan, and are unable to pay it off due to a break in employment, they may be under pressure to take another loan to pay off this loan. This can result in them falling into a debt trap.

  • Avoid Dependence on Credit Cards- Millennials can avoid spending using their credit cards, especially in a situation, where they have no job or their income is severely affected.

3. How much money should you allocate for an Emergency Fund ?

  • The amount that you should keep aside as an Emergency Fund depends on your income, expenditure, family size & lifestyle. But, the widely accepted number is the one that is three to six times your monthly expenses.

  • These expenses include fixed expenses (rent/maintenance, insurance premiums or Loan EMIs, maid's/ driver's salary, school fees), and variable expenses (utility, grocery, medicines, electricity, phone & internet).

  • These expenses would not include travel, clothes, gym membership & cable bills or other discretionary expenses.

  • For example, if as a single person your salary is Rs. 40,000/- and you spend Rs. 20,000/- per month on the expenses, the amount of the emergency fund you should target to have should be from Rs. 60,000/- to Rs.1,20,000/-.

  • If you have a small family with a kid or two young kids, with a single earning member, it is advisable to have upwards of six months to one year of your monthly expenses as your Emergency Funds to ensure a good life.

If you haven't got a Emergency Fund, 2020 is a great year to start planning & building on that.

Stay Tuned for Part 2 of Emergency Fund Series, where we will share How to Build an Emergency Fund?, How to Invest a Emergency Fund? & Redemption of an Emergency Fund?

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