Rajiv Goel Bombay Capital Services
There always comes a time, when no matter how well you plan and save for the future, an unexpected expenditure shows up putting cash flow pressures. Emergency expenses such as a loss in income, a household repair, or a major medical bill can put a significant financial burden on you and your family.It’s no fun to meet with an expense you didn’t plan for. These days, they’re everywhere!
Unfortunately, these costs will always be around to haunt us, so by anticipating them and building the savings to cover them, we’ll be less stressed when they do happen. There are ways you can address unexpected costs and turn them into something less problematic by planning for them. Isolating your emergency fund from all other savings and investments is the traditional way of building an emergency fund. Having three to six months worth of living expenses (preferably more) in an emergency fund would be a good benchmark amount to fall back on.
If you currently don’t have an emergency fund or find it difficult to save money the key is to start small. After taking care of bills and other immediate payments, set some money aside in a savings account or money market fund equivalent to 6 months to a year’s worth of expenses. Any more cash you are able to build up beyond this point can go into your investment portfolio.
The best way to get started would probably be through your bank. Open up a new savings account if you currently don’t have one and begin to save with this first. The next step is to get into the habit of making regular deposits into this account. Whether it is weekly, bi-weekly or monthly, create a schedule and stick to it. Once you make savings automatic you won’t even have to think about it.
Any time you’ve used up some portion of your emergency fund, work on replacing the lost funds as soon as you can. The emergency fund is there to ensure that you have a liquid cash source when you need it most and if you can make sure it exists for you at all times, then you’re in fine shape, regardless of how you define an “emergency”.
There are other ways to counter short term funding requirements whether for you business or personal needs.An overdraft occurs when money is withdrawn from a bank account and the available balance goes below zero. In this situation the account is said to be "overdrawn". If there is a prior agreement with the account provider for an overdraft, and the amount overdrawn is within the authorized overdraft limit, then interest is normally charged at the agreed rate. (Source Wikipedia) It can be very easy to think of your overdraft limit as your spending limit. But an overdraft should really only be an emergency fund or a short-term credit option. After all, if your overdraft is maxed out, then it won’t be available in a real emergency. You may also find it hard to get credit elsewhere.
Having access to an overdraft facility helps bridge short term needs or you can always try to get a loan or use credit cards, but these may only make the problem worse. If you have decided that an overdraft is the right way for you to borrow money in the short term, make sure you avoid the highest fees.
While borrowing money can provide quick access to cash, it can also come with high interest rates and a new monthly payment. If you’re experiencing a financial hardship for an extended period of time, you may find yourself in a downward spiral that is nearly impossible to recover from.
The key is to stay positive and keep searching until you find a solution that works for you.
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