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Personal Finance

Your Emergency Fund – Make Hay While the Sun Shines, But When It Doesn’t….

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Life looks funny in hindsight. Our younger self in that life looks hilarious, all worried and anxious about how a bad situation would ever be overcome! There’s a horrible boss at work. You can’t leave, because hey, EMI. And now,today, done and dusted with whatever that situation was, more alive than before!

But let’s go back to that situation for a minute. Why did it take you so long to get out of that situation?

More often than not, money – and to be precise, the lack of it – will be the reason.

You stuck to that shitty job for money. You stuck with the messed-up person for money. You could not get your parents out of a certain situation because of money. And I can go on and on. Anything that affects you or your loved ones’ personal well being is a situation that needs to be dealt with on priority. It becomes an emergency.

Money should not be a hindrance in such a situation, it should be your strength. And that’s where that Emergency Fund come in!

What is an Emergency Fund?

It is the money that has your back. The money you have when you need it the most. When the sun stops shining. When the job stops paying. Because either you leave, or you’re asked to.

When the other person in your life turns out to be a douchebag and you need to get out of that situation and not stay in it only because they put food in your mouth. I can’t leave because I can’t live without the money is the exact situation you avoid by having a fund that allows you the freedom.

It is the money that will give you good night sleep.

It is the money you will be thankful for in your tough times.

This is a new fad. My parents never had an emergency fund.

I know it’s an era of YOLO. For everyone who lost me at YOLO, it stands for You Only Live Once – the life mantra of millenials!

An era where following our passion and not living the ‘monotonous life’ our parents lived, is the motto. The guiding principles of life. And so we live more, take more risks, lesser responsibilities, more fun yeah?

Well that’s one side of the coin. The other side is unknown. The bad kind of unknown. The other side is a pandora’s box of what-can-go-wrong. And this coin that we flip so often in our YOLO lifestyle, the coin sometimes sits with the rotten side up. And then comes out the unknown, the emergency.

The definition of emergency has broadened from our parent’s (its-a-long-life) generation to our (it’s-a-short-life-so-YOLO) generation. Ask your parents and they would scoff in disbelief at how much we plan and how little we execute.

Our parents’ generation and ones before them executed more, planned less. (We are 3 siblings. Each of my parents is part of 6 sibling clan. Just saying)

But considering we have decided to go the opposite way to lead our lives – no responsibility, more risk(fun?) – this equation also changes for us.

We need to plan more than them.

But I have debt that I am repaying.

Good for you, get rid of that debt. But keep the emergency fund on, no matter what. If only emergencies could be rescheduled, I would reallocate them to only when I’m rich.

Consider this, if you are aggressively paying off your debt from all your savings and you lose your job, what happens then? A new job may come in a week or take as long as 6 months. How do you intend to survive?

The debt and the survival, both need money. It is a cost benefit analysis. The cost of repaying a little less debt and more interest is worth the benefit of a secure fund. Isn’t it?

Okay, how much do I need?

You need six months of your living expenses. This is not only what is generally recommended, this is coming straight from my own personal experience.

I and M, at one time went ‘jobless’ together. I had some business income which I put back into the business.  It took him exactly six months to find a job. So yes, I endorse six months emergency fund very strongly. Highly Recommended!

Covering basics is important – your bills and food. Bare minimum living expenses for six months. But you can chose to include your investments also. Rent, food, commute and phone bills, and then if you have kids, all that goes with it.

So I compute my emergency fund as six months all-inclusive money and not only living expenses. I want my savings to continue while I figure things out.

But that’s too much!

Yes, it is! Therefore, more the reason to save it. Also, it may take some people a few months to get this fund in place while for some it may take years. So what?

Consider this. Your emergency fund requirement is Rs 4 Lakh. You have Rs 2 Lakh in your account when the emergency strikes. What is better, no emergency money or Rs 2 Lakh?

Now consider this, your emergency costed you Rs 1.5 Lakh and you are left with Rs 50,000. So what? Isn’t this why you were saving in the first place? For the emergency!

The money has served its purpose. Get on to building the fund again, at your own pace. The regular you are, the better.

Where to keep it

First and foremost, keep it separate for a simple reason that it is meant for emergencies.

Booking vacation tickets at last moment is not an emergency. Neither is buying new formal clothes for tomorrow’s conference. If the fund is not separate, it will be spent on things that are not an emergency.

The emergency fund has to be liquid, meaning it should be easily available at the time of crisis.

But it should not be kept in a bank account because :

a) It is just an ATM swipe away, so greater chances of unnecessary spend

b) you will wish it stay there forever and you never have to use it. For forever storage, liquid funds will give better returns than bank accounts.

Liquid funds are a type of debt mutual fund. But these invest in instruments that are not affected greatly by interest rate fluctuations, so they give steady returns.

Dude(tte), that’s boring and so pessimistic

Well, building an emergency fund needs patience. You will pretty much feel like a crow dropping  pebbles in the pot and hoping for water to rise. It will, eventually. At the right time, just when you are thirsty enough and need the water for your survival.

And it is not pessimistic, it is realistic. Like I always say and believe, it is great if life is all good and you never need to touch this money. But your life should not turn upside down for a single day that you need it.

YOLO, for the records, is amazing. I am totally sold on the idea of You Only Live Once. I am just not sold on the idea that emergencies are for future and not a part of the present.

Think.