Most of us plan for the positive outcomes like child’s education, buying a house or car, retirement planning, among other events. This is of course, a good thing. Now only if the negative outcomes of life also kept us on our toes..
Simple logic tells us that planning for the bad things in life is necessary perhaps with even more urgency. This is particularly true if the negative outcomes are laced with financial implications or losses.
This gives rise to the emergency fund.
What is an emergency fund?
This is the sum an individual needs to build over time so that he has money to last for at least six to nine months to meet regular household expenses. Alternatively, the fund should have money equal to six to nine months of the current salary.
Ajinkya, a mid-level executive in a private firm,never considered building an emergency fund. That changed when his colleague and best friend – Chandra – met with an accident while commuting to the office. He sustained series grievous injuries and his vehicle was badly damaged. Chandra just did not have enough funds to cover damages to self and vehicle.
He resorted to the only option available – borrowing money from Ajinkya.
Ajinkya wakes up to the need for an emergency fund
Ajinkya gets a wakeup call with Chandra’s accident and subsequent crash crunch. He realizes that he needs to save money for emergencies.
Here are three main reasons why Ajinkya must plan for the next emergency:
Breakdown of health
A medical emergency or accident, depending on the intensity of the mishap, can burn a big hole in Ajinkya’s finances.
A serious accident-related injury could cost the victim anything upwards of Rs 2.4 lakhs going by a report from IIT (Indian Institute of Technology) Delhi. And even this number needs to be reconsidered given that it is from a 2004 research paper, so its dated. Also, estimates were from public/government hospitals which benefit from subsidies; private hospitals are likely to be even more expensive.
If the victim does not have health insurance / mediclaim or if the cover is not adequate, he will need ready cash to treat the injury.
This is where an emergency fund could be a lifesaver – quite literally.
Loss of employment
The only constant today is that tomorrow will be very different. This is true for most industries and organizations operating in those industries.
Ajinkya works in the retail sector. His job is quite secure at present. But you never know where Ajinkya or his position will be as more buyers and sellers migrate online.Ajinkya could be on the lookout for another opening in a while, one never knows.
While he is between jobs, Ajinkya will need money to pay bills and generally maintain his existing lifestyle. The longer he takes to find a job that matches his profile, the more money he will need to meet expenses.
If Ajinkya had an emergency fund with money equaling six months of regular expenses, it would help him tide over financial woes in the absence of a job.
Breakdown of vehicle, house repairs
Ajinkya owns a vehicle, which is his ‘ticket’ to his workplace and just about every place within the city. If he had to go for in expensive, unforeseen repairs, it would set him back considerably even with the motor insurance, since it doesn’t cover repair / part replacement.
Equally distressing for Ajinkya would be unplanned house repairs in rains or structural repairs undertaken by the housing society with contributions from all members.
Again, an emergency fund would prove very useful for Ajinkya over here.
With so much uncertainty in every sphere of life, be it personal, familial or official, an emergency fund is no longer some fancy concept that financial planners throw around. It is a must-have for every responsible individual looking to support himself and his family during a financial crisis.