Before I start writing my thoughts on emergency fund, I want to understand where you are with it. If it is of any comfort to you, I started saving for “Emergency Fund” very recently. So no one is judging.
(I am very new to blogging, have somehow embedded a google form for this. There is a full post below. Please record your responses and proceed to read further)
What is Emergency Fund?
Well, it is the money that has your back. It is the money that will keep your crazy in control when an unforeseen event happens.
When the sun stops shining.
When the job stops paying. Because either you are deemed unusable by the company or you are disabled by your circumstances.
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.
It is the money that ensures you pay your bills and eat your food while dealing with the situation.
It is the money that will give you good night sleep.
It is the money you will be thankful for in your tough times.
Well, 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 your 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 other side is a pandora box of what-can-go-wrong. And this coin that we flip so often in our YOLO lifestyle, the coin sometimes sit with pandora 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. If only emergencies could be rescheduled, I would give them slots in my rich times.
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 right from my own personal experience.
I and M, at one time went ‘jobless’ together. I had some business income but that I would 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.
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! And therefore more a 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 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
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 money is not separate, it will be spent on things that are not an emergency.
Second FDs is not an emergency fund because it not liquid. 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 easily accessible to you, 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 (Read more on this here and here). 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 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.
Also published on Medium.