Do not index
Do not index
This is the 1st part of our ‘Emergency Fund’ article series.
You can jump to the other parts directly if you wish:
Part 2: How Much Should You Have in Your Emergency Fund? →
Part 3: Where to Park Your Emergency Fund? →
Part 4: How to Create Your Emergency Fund? →
Losing your job. A medical emergency in the family. An expensive bike/car repair. A couple of appliances in your home breaking down on the same day.
There are so many unexpected events that we and people we know deal with every day.
When these emergencies hit us, they take a toll on our mental, physical and financial health.
But here’s something interesting: If you have a very large amount of money then most of these emergencies would not matter much, at least financially.
Sadly, that’s not true for most of us. We need to make financial provision for these emergencies in one way or the other.
There are two ways to provision for emergencies:
1. Save money for each critical emergency you can think of
2. Insure your belongings wherever feasible and needed
In India, the financially prudent generally insure 3 things: life, health and their vehicle(s). They are among the most critical long term aspects of living.
But how do you insure against losing your job, another critical aspect of life and the source of your financial well-being?
What is an Emergency Fund?
The post-COVID years have shown us how fragile most economies and companies are. Millions of employees across the globe lost their jobs as companies laid them off left, right and centre.
Most of these employees were not financially prepared to face the sudden layoffs. Because they didn’t save or put their savings in the right places, they were left with no choice but to seek monetary help from friends and family.
While nobody could control the layoffs that were imposed on them, they could have made a provision for the situation by having an emergency fund in place.
Simply put, an emergency fund is easy-to-access money to be used only for emergencies like a job loss.
What is not an Emergency Fund?
Your emergency fund is not backup money if your bank balance is insufficient while buying your next phone or planning an international vacation.
Also, your emergency fund is not how to pay your medical or car repair bills. You must insure your health and your vehicles. You must also insure your life if you have financial dependents.
Simply put, your emergency fund is strictly for emergencies. To follow this, you need financial discipline.
Since we have been talking almost exclusively of job loss as an emergency, it is important to clarify that job loss is not the only emergency that exists but definitely the primary one. Only you can qualify what other situations qualify as emergencies for your personal situation so you can provision for them.
For example - If your AC breaks down in the middle of peak summer, it is definitely an emergency if you are in Mumbai or Chennai.
But irrespective of where you are - If you are lured by a newly launched 1.5 lakh rupee phone while your phone is in a perfectly okay condition, that’s not an emergency. If you need the phone to become a content creator, still it is not an emergency. It is a business expense.
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