We, humans, have the very short memory we are much focused and busy in our daily routine and we fail to follow some very important basic things in life like a daily morning walk, breakfast. We forget the things easily whether it is our own experience or someone else’s. We all know what emergency fund is and its importance but very few families actually realize the importance of Emergency or Contingency Fund and maintain the same for urgent needs.
In recent times we heard that well-paid employees of very stylish airlines started
selling their household articles as they didn’t get a salary for 2 – 3 months, so this means bankruptcy in 3 months, some of the employees of the airliner committed suicide also. You must have seen some families in a society which faced an immediate liquidity crisis in case of sudden death of any family member and they had to borrow for last rituals. This situation could be avoided by preparing for a question – For how many months I can survive without income. How much Emergency fund do I need?
Benefits of Extra Liquidity
Why should we take these extreme examples, let’s talk about benefits of some extra liquidity? We normally enjoy our life and sail smoothly, every family has a certain cash flow and there can be some emergency situations which may not allow us to go forward in life. For good future, the most important thing is a career, which gives you regular incremental income and you achieve milestones of life like marriage, buy a home and buy a car, kid’s education, yearly vacations, luxury of life and your retirement because of your career. Extra liquidity can buy medical assistance if some family member meets medical emergency or in any situation that can be solved without your personal assistance. This allows you to maintain the expenses of the family for some period without earning of earning member. Because of the Emergency Fund, you can focus on your career except for the emergencies which affect you personally.
Importance of Emergency Fund for Salaried people
Be confident in front of Boss High salary doesn’t mean sustainability, we need to accept the fact that most of the families in private sector can go into a serious liquidity crisis in just 2 – 3 months only. At present competition in job market is very high, automation and juniors are going to replace the seniors. More and more people are starting consultancy after leaving the job. Everyone has to leave the job but the question is by whose wish, self-decision or because of compulsion. In this scenario, the people above 40 years of age should plan their emergency fund for a longer period. Moreover, the comfort of liquidity gives confidence in front of the bad boss.
Emergency Fund for Self Employed
In self-employment, we need to understand that a single day leaves even if it is for vacation is LWP – Leave without pay. It takes years to establish you as a self-employed and when it comes to emergencies, these can actually make a dent in a career. These people don’t get income like salaried people in case of illness; moreover, the expenses of a family don’t stop at the same time. So it’s a double dent on the financial health of a family, so people in self-employment need to protect them by maintaining adequate kitty.
Small business owners also fall into this category, their families are always exposed to the risk of business liabilities. They should know the immediate liquidity requirements for business and maintain that amount for business separately. I personally interviewed many businessmen who suffered the loss in business and lost almost everything they had because of using personal funds in the business.
For Businessmen liquidity is important
Businessmen are the people who have teams of professionals to look after their business. They should also maintain liquidity at a personal level for bad phases of life. Every business always goes through business cycles and it requires a certain amount with different phases but life doesn’t stop even at recession. So it’s really important to maintain personal liquidity for businessmen. This kitty for liquidity should always be used for personal emergencies in the family only. This shouldn’t be mixed with business.
When it’s the time to live life king size, the importance of emergency fund goes up. In this phase of life as a retired person, you may have the responsibility of your spouse and you may also have responsibilities of your children living in the different city and they may treat you as your emergency fund. At least you may have your own responsibilities and sudden medical care should always be kept in mind. At present the medical costs have gone up and continuously rising, in this scenario you must maintain funds for emergencies, keeping your health condition in mind.
At this age cash equivalent to the expenses of two months should be kept at home. Moreover, 2 to 5 lacs should be invested as the medical emergency fund. Retired people should plan monthly pension very carefully as most of the popular financial instruments give you returns lower than inflation, which means you will have to reduce your lifestyle with the passage of time.
An emergency fund is used in every stage of life when it’s the matter of young; it gives you the buffer to settle in the comfortable job after 2-3 switches, till you find the right job. In any case having emergency kitty is a wise choice and sign of maturity. Many times it helps you in choosing the right path specifically when you don’t want to take the assistance of parents. This habit of maintaining funds for an emergency is valuable for whole life, so it’s better to start early otherwise it’s going be expensive in future.
Our financial well being is the result of series of small right financial decisions that we take in our day to day life. Finally, it’s a good habit to be financially prepared for emergency situations in life even if they occur twice or thrice in life. Whenever the unfortunate things happen it may have the potential to give big setbacks. This kitty has importance for people from every walk of life at every stage.