Money Milestones
FUND- THE BRAKES ON
YOUR FINANCIAL RIDE!
Would you drive your car at, let’s say, 100
miles-per-hour if I told you that you have got no
brakes on it? Well, unless you have a scary,
gruesome and a disgusting death dream, you will
not.
Now, having brakes in your car, does not only
provide you safety at the time of a calamity
(someone suddenly appears on the road) but also,
lets you drive faster and take risks, as your brakes
are there to have your backs. If anything goes
wrong, you can just apply brakes, and resume your
ride.
Now similarly, while making any financial decision,
why shouldn’t you focus on these financial brakes
first? And these financial brakes are emergency
funds. Having a sufficient emergency fund would not
only let you live your life care-free, but also would let
you take more risks.
I have met investors scared to lose their money in the
stock market, because that’s all the money they
have. I have also seen people struggling hard to
make their ends meet if they had been laid off
during the pandemic. There is just one solution to
both these problems- Emergency fund!
Crises are inevitable, you cannot control them. But
you can definitely be more prepared for them.
Emergency funds will help you go on with your life till
the time you get back on track. And with money kept
safe for emergencies, you can get more aggressive
with your investments as well.
How much is enough?
A question of paramount importance is how much
emergency fund do we need to survive and sustain
through the financial lows of life?
Ideally, a good rule of thumb from personal finance
suggests an individual to have an emergency fund
equal to at least 6 months of his/her total expenses.
So, if your total monthly expense lies somewhere
near ₹50,000, you will need to have an emergency
fund of at least ₹3,00,000, if we go according to the
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rule of thumb.
But there are a couple things that will impact your
emergency fund. For example, if you are living in a
country where there is no facility of universal
healthcare and you have a serious medical
condition, you will need to have a higher emergency
fund when compared to an individual who is not
suffering from any serious disease but has the same
expenditure (₹50,000 in this case) like you do.
The value of an emergency fund is also impacted by
the economic volatility which stands directly propor-
tional to the amount that you need to have in your
fund. Furthermore, the emergency fund is also
impacted by the importance of tangible goods that
you have acquired in your life till now, for the reason
that a breakdown of such goods can cause a
disastrous ripple or domino effect.
For example, if your work is based in the countryside
and your car is your sole transporter to your
workplace, then a breakdown or any sort of major
damage to it can stop you from going to work for a
while or you might even miss an important day, if
you do not have a substantial sum of money ready
to finance the car’s repair as soon as possible. Well,
this was just a hypothetical situation that you were
put into, you are free to replace the car with any of
your beloved tangible goods and the situation might
be the same, if you do not have any emergency
savings.
Where to park your emergency fund?
There is no such thing as a free lunch! So, let us talk
now about the cost of holding an emergency fund.
Considering the human race to be attributed with
the traits of being witty and ingenious, I guess by
now you might have figured out the importance of
‘liquidity’ while formulating an emergency fund.
Since you are reading this piece on emergency
funds, I have presumed that you understand the
meaning of ‘liquidity’ in an investment option.
Moving ahead, why liquidity is such an important
factor in the creation of an emergency fund, can be
explained by the rationale of having a fund in hand,