Why Having an Emergency Fund is Crucial for Personal Finance

The Importance of Personal Finance

As an expert in stock markets and financial education, I often emphasize the importance of personal finance. Before you even think about trading or investing in the markets, it is crucial to have your personal finances sorted out. Starting your financial journey without a solid foundation in personal finance can lead to unnecessary risks and potential financial hardships. In this blog series, I will guide you through the best practices and steps you need to take to start your personal finance journey.

The Need for Personal Finance Kickstarter Course

Many individuals ask me about beginner finance courses, specifically looking for a personal finance Kickstarter course. If you are one of those individuals, I recommend watching these short videos as a valuable first step in your financial journey. By understanding the fundamentals of personal finance, you can establish a strong financial base before delving into more complex investment strategies.

The Importance of an Emergency Fund

In this video, I want to highlight the importance of saving money for an emergency situation. Life is unpredictable, and emergencies can occur when we least expect them. Just like my personal experience during the COVID-19 pandemic, unexpected expenses can arise, and having a financial safety net can make all the difference.

During the pandemic, I found myself needing to upgrade my IT infrastructure at home due to work-from-home and remote schooling requirements. However, supply chain constraints made it challenging to find affordable equipment. Additionally, both of my parents contracted COVID-19, further increasing the financial burden. The treatment costs were exorbitant, and I wasn’t even sure if my insurance would cover it. Fortunately, I had an emergency corpus in place, which helped me navigate these unexpected expenses.

Building Your Emergency Corps

Now that I have underscored the importance of an emergency fund, let’s discuss how to build and preserve it. The first step is to estimate the amount you would need as an emergency corpus. While some experts suggest saving at least six months of expenses, it is essential to tailor this number to your specific circumstances. Sit down with your family or loved ones to determine the right amount that provides peace of mind and ensures your financial stability.

For example, you might decide that 10 months of expenses, or 5 lakhs in rupee terms, is an appropriate emergency corpus for your family. Once you have identified the corpus requirement, you can begin accumulating the funds. The most common approach is to save a small portion of your income each month until you reach your target. Alternatively, if you already have a significant corpus, you can set aside a portion specifically for emergencies.

Parking Your Emergency Funds

When it comes to maintaining your emergency funds, it is crucial to choose the right financial products. One common mistake is investing the emergency corpus in stocks, equity mutual funds, or other volatile assets. This is a risky decision as it can expose your funds to unnecessary market fluctuations when you need them the most. Instead, opt for financial products with low volatility and quick access to funds.

A simple fixed deposit, short-term bond funds, or liquid funds are suitable options for parking your emergency funds. These instruments provide both liquidity and capital protection, allowing you to access your funds immediately during an emergency. Personally, I have divided my emergency corpus between a classic fixed deposit and an arbitrage fund. Arbitrage funds, which invest in hedged positions, offer stability and minimal risk.

Accessing Your Funds During an Emergency

While liquid funds provide quick access to funds, there may still be a settlement period involved. In situations where immediate access is crucial, don’t hesitate to use your credit card as a temporary source of funds. Utilize the grace period offered by your bank to pay for emergency expenses and repay the credit card bill as soon as your liquid funds are available. This strategy can help bridge the gap and provide financial flexibility during critical situations.

It is important to note that tapping into your emergency corpus should be reserved solely for genuine emergencies. Avoid using these funds for non-essential purposes, as it defeats the purpose of having an emergency fund. Instead, focus on rebuilding your corpus after each utilization to ensure you are prepared for future unforeseen expenses.

Conclusion

I hope this blog has convinced you of the necessity of having an emergency fund as part of your personal finance journey. By building an emergency corpus, you can safeguard yourself and your loved ones from the financial stress that unexpected situations can bring. Start your personal finance journey on the right note by prioritizing your emergency fund.

If you have already built an emergency corpus, I would love to hear about your preferred financial instruments for saving these funds.

Leave a Comment