What is an emergency fund? and Do you need an emergency fund?
My views of an emergency fund have changed a lot since the Satyam episode! For most of Satyam employees Raju’s ‘confession’ was an emergency. How would they have adapted to it? Or still adapting to it?
What would happen to you and your dependants if you were to lose your job today? After 3 months? After 12 months? Are you prepared for it?
Take a worst case scenario – your company has just retrenched you (forget the salary, you have lost group medical cover) and you have had an accident. Where does your family meet its next fund requirement from?
Welcome to the world of emergency funds.
In life accidents happen when you least expect it, does it not? If there is a financial emergency (i.e. your main source of cash to meet your day to day expenses is threatened (temporarily or permanently) what do you do?)
The best you can do is to prepare for emergencies that require access to additional money and having an emergency fund is the ideal solution. Financial emergencies can come in various forms. What could it be? Well it could be a job loss, medical expenses, involuntary travel, identity loss, etc. If the problem is clearly temporary you may be able to deal with the credit available on the credit card or take a personal loan. Examples of such expenses are medical emergencies, car repair, etc
However if it is of a slightly more long lasting nature – like a job loss – you do not want to take credit risk. If you are not able to repay on the due date, what happens?
Best course of action is to create and keep a nice Emergency fund – and use it. Some people think having a credit card un-drawn limit is a good way of keeping an emergency fund. I thought so too till the Satyam episode! As soon as Raju ‘confessed’ most banks quickly put a ceiling on the amount of money you could draw on your card.
So I suggest keep your emergency fund safe. How to do it, we will see separately!
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