Rupakumar Pradhan, CFPCM, CWM®

Personal Financial Advisor

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5 Reasons Why Emergency Fund is Important?

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5 Reasons Why Emergency Fund is Important?

5 Reasons Why Emergency Fund is Important?
April 22
18:43 2020

Covid-19 Lockdown and emergency fund requirement. Just imagine the situation!

 Life is full of surprises — some good and some bad. Most of us just try to ride the wave the best we can, making the most of what we have. Just see the current situation, we have not heard about Covid-19 virus earlier. We have not seen and experienced this type lockdown situation in our country. We have not experienced about whole country lockdown and also world lockdown.

You can manage your health by taking all protections as per the Indian government health tips. But what are your opinions about your financial situation? How do you manage your current monthly expenses? How do you manage current situation as well as post covid-19 situation? Having money in savings to cover at least a month or two of living expenses is important.

Unfortunately, many people have no emergency fund.  Worried about running down their savings account balance during this current Covid-19 situation? Worried about the current lockdown?

Remember, having an emergency fund is one of the most important things you can do. It’s part your financial life. It’s part of your family financial life. And it is also working as life blood in your entire financial life. Emergency Fund is important for every person. One major belief for financial planning is that it’s good to have an emergency fund in place.

What is an Emergency Fund?

An emergency fund is an essential corpus that you must keep aside to tackle emergencies just like current Lockdown, job loss, unexpected home repair or medical emergency etc. It is a fund that you can fall back on at the hour of crisis or for unexpected and unplanned scenarios, and not for meeting your routine expenses. So, you must design it specifically to meet unanticipated financial shortfalls that may apply to you.

Many people fail to prepare for the future. Financial security is important for every person. An emergency savings fund can help individuals look forward to the future without worrying about being unprepared for unexpected expenses.

Having an emergency savings fund is critical to the financial security of your family. Here are five reasons you should have an emergency fund.

5 benefits of having emergency money

1. It helps keep your stress level down.

It’s no surprise that when life presents an emergency like this Lockdown situation, it threatens your financial well-being and causes stress. If you’re living without a safety net, you’re living on the “financial” edge—hoping to get by without running into a crisis.

One of the worst consequences of not having any emergency savings is the money stress it adds to our lives. When you’re living monthly salary-to- monthly salary, even a minor hitch like needing new car tires or a medical emergency pay can throw you off track. Then you’re left scrambling to figure out how to cover those surprise expenses while also keeping the lights on and food on the table. Times like these are the worst time to try to find a fast loan. Finding money quickly may not come with the best terms — you may end up responsible for having to pay back more than you bargained for.

Being prepared with an emergency fund gives you confidence that you can tackle any of life’s unexpected events without adding money worries to your list.

That’s why I suggest our clients build up emergency savings in addition to paying down high-interest debt.

Even if your tax refund is only Rs. 1,000, having that money set aside could help you sleep easier. And when the next random expense comes along, you won’t have to panic or turn to an emergency loan.

2. It keeps you from spending on an impulse.

You’ve heard the saying “out of sight, out of mind.” That’s the best way to store your emergency money. If the cash is only as far away as your closest debit card, you may be tempted to use it for something frivolous like a designer dress, iPhone 11 or big-screen TV—not exactly an emergency.

Keeping the money out of your immediate reach means you can’t spend it on an impulse, no matter how much you’d like to.

And by putting it in a separate account, you’ll know exactly how much you have—and how much you may still need to save.

3. It helps you make a big impact at once

One major concept in behavior science is the concept of willpower reduction — the idea that we have a limited amount of self-control which gets used the more decisions we make. In other words, making one good decision is easier than making multiple small decisions..

Thinking about how to build an emergency fund can be overwhelming. Your tax refund is one of the few chances throughout the year where you can make one good decision with a sizeable initial impact.

Instead of saving, say, Rs. 200 a month for 12 months to build an emergency fund, which may require dozens of small decisions a month, you can simply save it all in one big chunk.

4. It keeps you from making bad financial decisions.

There may be other ways you can quickly access cash, like borrowing say credit card or Bajaj Finserv card, but at what cost? Interest, fees, and penalties are just some of the drawbacks.

Bajaj Finserv Personal Loan Interest Rate: 11.99% to 15.50% per annum, Processing Fee payable to Bajaj Finserv: Upto Rs. 2,000. Current offer for processing fee is Starting from 1.50% or Any bank provides low-interest rate Credit Cards at 3.99% per month (47.88% per annum). Just imagine the impact of this interest rate on your income.

5. It helps to improve your life in the long run

I have seen people make some big mistakes with their tax refunds during their career, not even thinking about save this money.  You should save money for the emergency fund which will help you in the long term.

To ensure the financial future for a family in long run, an emergency fund is necessary. No one is able to save enough money to pay all of his or her expenses if they go through difficult situation like current Covid-19 Lockdown, rough economic period, job loss,  injury or sickness. Therefore, it is essential that each individual set up an emergency fund  to ensure the money is available when it’s needed.

A good choice to make is to save your tax refund in a high-yield savings account for the next time you need money now, and your future self will thank you.

How much money is needed for an emergency fund?

While coming up with a budget for your emergency savings, you should think about how much money you need to live comfortably every month say your monthly household expenses.

Ideally, your emergency fund should be 3-6 months of monthly expenses. But you have to check your own situation. So if a family requires Rs. 20,000 a month to pay all of its monthly expenses, then it should strive to accumulate Rs. 120,000 (say six months) in an interest bearing emergency savings account. This sounds like a lot of money, but if a certain amount is put away on a steady basis, then this financial consistency will be rewarded with a quick accumulation of that essential emergency nest egg everybody requires.

Times are uncertain. The Covid-19 health crisis is affecting many Indians’ job security and the economy in general. Having no emergency fund can put you in a tricky situation. Don’t fall into the temptation of spending your tax return and deposit the money into your emergency savings fund instead. It’s the best way to jumpstart your emergency savings.

You’ll never regret saving for life’s surprises, but you could very well regret it if you don’t.

Start saving for an emergency fund today.

Plan Well To Live Well!

“The way to get started is to quit talking and begin doing.” ~ Walt Disney

 

I am a CERTIFIED FINANCIAL PLANNERCM, CHARTERED WEALTH MANAGER®. For the moment, I have shared my experience growing up with you because it had a tremendous impact on how I do what I do.

If you have a question about your own financial situation please connect with me.  I’d be delighted to try to be of service.

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Personal Finance Concerns during Covid-19 Crisis. Read it

About Author

Rupakumar

Rupakumar

Mr. Pradhan has over 22 years of experience in financial services industry. He was previously working with leading Life Insurance Companies, Broking Firms, Distribution Company, Financial Planning Company and Health Insurance Company. He has cleared several NCFM modules & is also AMFI Certified. His expertise is in Comprehensive Financial Planning, Technical Analysis, Portfolio Management, Investment Advisory, Wealth Management & Business Development.

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