Hello Readers!
The COVID-19 pandemic brought extreme uncertainty for all of us in the year 2020. It made us realize the importance of an emergency fund, and why it is necessary to first create your emergency corpus once you start earning, or before you plan to start your investment for your goals.
An emergency fund is very simple to understand, but very much essential to be built. People who failed to survive in the corona pandemic during lockdown were those who lack emergency corpus. While those who got over this lockdown even after losing their job were those who had their emergency fund already built.
An emergency fund is essentially money kept aside in very low risk, flexible investment options, or even a separate bank account that caters to at least six months of your living expenses. Creating an emergency fund is a priority even before you start investing, also keep in mind it is not a one-time affair, you need to revisit your emergency fund, at least once a year. You need to rebalance your emergency fund at least once a year so that it grows effectively to cater to your financial needs in any kind of emergency.
While rebalancing your emergency, do look over the following aspects.
Making Provisions For Financial Changes
An Emergency fund is prominently built up to cover your living expenses when the regular source of income stops suddenly. And we all know with growing time our living expenses do not remain the same. It keeps changing, better say keeps increasing. If there has been a material change in your circumstances like the addition of a family member or a change in house rent, make sure to add these in for your future emergency funds.
Understand What To Include In Emergency Fund And What Not!
Here you are suggested to build your emergency fund for your living expenses and not your wants. Ah! Don’t confuse between Living Expenses and your wants. Your living expenses are what you spend on necessary things, and your lifestyle expenses that are your wants, are what you spend on brand, entertainment and leisure travel among other things. You do not need to include your wants in your emergency fund while you are creating your emergency corpus. While reviewing your emergency fund for the next year, make sure you don’t add any such lifestyle expenses into the kitty.
Rationalize Provision Where You Can Instead Insure It!
If your emergency fund is structured in such a way that it includes health expenses then I suggest, rethink your allocation. Health expenses or medical emergency expenses can be covered via insurance and there is no need for you to put aside large sums for such eventualities. Review your emergency fund allocation and make sure that you are not over-allocating to expenses that can be covered via insurance plans.
An emergency fund in today’s time is an essential part of your financial planning and this fact is already proven by this COVID-19 pandemic. As we are soon going to enter the new year 2021, it’s the perfect time to plan your investment and before that, on a prior basis, calculate your emergency fund and create it first.
If you are one among those who had their emergency fund built that helped you to sustain this hard lockdown time, then I suggest, in this new year plan to revive your emergency fund as soon as possible.
For any kind of query regarding financial planning you can contact us at Shri Ashutosh Securities Pvt Ltd., we are here to help you in any way possible.
Happy Investing!
(Mutual Fund investments are subject to market risk Illustrations are for example only, there is no guarantee of returns. Past performance is not an indicator/guarantee of future returns).