The Importance of an Emergency Fund

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While it’s important to be debt-free as early in the working life span as possible. It’s equally important to create an emergency fund prior to embarking on the journey to be debt-free.

The current generation in their 40s would probably be the only ones who would require the need to take the financial responsibility of both their parents as well as children – both in terms of good education (which can be expensive) and as well as retirement corpus.

The earlier generation spent all the savings on children to get them settled but did a little bit for themselves as the underlying presumption was that the children would take care of them during their retirement.

In today’s times, most of the millennials live on a variable mode on a paycheck to paycheck basis without any fall back on savings. Let alone emergency fund.

Consumption is a major driver with a little focus on future savings. I myself was a part of this rut at the early stages of my career and made the same mistake.

In the current job market, downsizing or rightsizing is a norm if the business is not doing well. In such scenarios, the generation which is habitual of a consumption lifestyle and out of jobs would find it hard to adapt due to low savings.

The quantum of the emergency funds would vary from person to person. But I would recommend an amount equivalent of 3 to 6 months of routine expenses. It is important to note that one should also include all EMIs due for the relevant period opted as a part of the emergency fund.

It may seem herculean to get to that level of savings for an emergency fund but one has to start. Initially, the fund might suffice 15 days of your expenses. But this can gradually be increased month-on-month to reach one’s desired level of the corpus.

Another thing you should do is take a medical cover for yourself (in addition to the one provided by your employer) early in your career. This would be cost-effective on account of age and would help tide any unforeseen expenses during the job loss period. You won’t have to dip into the emergency fund for larger medical outflows.

One thing that I had done in the early stage of my career – park a fixed deposit of Rs.1 Lakh for a longer tenure, take an overdraft facility against the same and link it to my savings account.

This overdraft usually cost me around 200 bps higher than the deposit rate. Without dipping into the FD, this helped me take care of my monthly marginal deficits. It used to happen in the last week of the month. And was repaid with my next salary credit.

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Cover Image Source: Fidelity Investments

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Balaji Thotadri
Balaji is a Chief Financial Officer at Talentedge, Mumbai. He is a graduate of Bombay University and qualified as a Chartered Accountant (Indian equivalent of US CPA) in the year 1997.
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