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Don’t have an emergency fund yet? Here are steps to get you started

Take one month at a time and try to first accumulate a corpus sufficient for six months’ expenses

August 12, 2020 / 02:36 PM IST

Dev Ashish

The past few months have been unprecedented for everyone and in many ways. In my discussions with clients during this period, one thing has been very clear. They are extremely relaxed when they have some sort of emergency savings during these times.

An emergency fund does give peace of mind. But the real meaning of this statement won’t be understood unless one goes through an emergency that requires money. It is more than just a financial buffer during hard times.

It is your Plan B and allows you to manage your emergencies a little better. And having it allows you breathing space to think through your options instead of panicking and making bad decisions.

But what should people without any emergency savings do?

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A person without an emergency fund may be in either of the two situations:

-Facing an immediate emergency

-Not facing any immediate emergency

Obviously, the first situation is the worst-case scenario to be in. And to be honest, the options are limited. Dip into your long-term investments, take help from family/friends, etc. And depending on the size of the financial emergency, one may have to resort to other options as well if the earlier ones aren’t sufficient. Asking your lenders to increase the loan tenure to reduce the EMI burden is also possible. Also, cutting down on expenses to the essentials is necessary.

The second situation is better than the first. But it’s like living on the edge. One strong gust of wind and you fall off the cliff.

So what should people who do not have emergency funds do? And who (luckily) aren’t facing any immediate emergencies as well?

First, do not be under the assumption (like many individuals) that you would never face a crisis. If anything, the COVID-19 pandemic is like a rude wake-up call.

Even if you are starting from scratch (i.e. nil emergency savings), first figure out how much you should save up for emergencies?

There are thumb rules such as having a minimum of 6 months of expenses. But for many others, a larger buffer may be required. So find out the right emergency fund size for yourself. And do not worry if the figure seems too daunting at first. It might be. But don’t worry. You can do it. And you need to do it. Start with one month and then take one additional month at a time.

Investments only after saving for emergencies

And I would go to the extent of saying that if your income-expense structure doesn’t allow for any surplus, then you can even consider temporarily stopping your ongoing long-term investments and instead focus first on having the emergency fund in the place. It is that important.

If you have been investing all your surplus for long-term goals and don’t have any emergency reserves, stop immediately. Fund your emergency buffer first so that you would not have to dip into your long-term investments at wrong times. What if the emergency strikes when markets are down? Then, you will be forced to book losses to fund your emergency. And dipping into long-term investments also upsets your financial goal planning.

In many cases, people try to prepay their home loans quickly but do not have any buffer. These people should also stop aggressive prepayment of loan and instead start shoring up their emergency reserves.

Building your personal emergency corpus (or whatever you wish to call it) should be the priority.

Even during this pandemic crisis, many people faced pay cuts and even got pink slips. But despite these troubles, those who had some emergency funds managed to handle things in a much better manner than those who didn’t have any reserves.

Start working on your emergency fund immediately. Take one month at a time and try to first accumulate a corpus sufficient for six months’ expenses. And if your circumstances demand, then increase the size further. Don’t save for six months just because your friend is doing it. And make sure you assess the adequacy of the fund at least once every year, as part of your annual personal finance audit.

Finally, if you use your emergency fund, make sure you gradually replenish it on  priority.

(The writer is the founder of StableInvestor.com)
first published: Aug 12, 2020 02:36 pm

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