Being thankful for what we have is one of the most beautiful feelings. But we often take this positivity too far. Very recently, I was talking to a friend about getting our residential complex insured against Fire. The friend dismissed my concerns saying that I am fretting for no reason and even her building is not insured. At the end of it, I felt like the pessimist in the argument, over-worrying as if hell is just waiting to break on us.
That evening, I read about fire in this high-profile high-rise and immediately called up my friend. It was my turn to make even. Well, not really. The friend conceded to my concern. She said that had it not been for our little chat, she would have brushed aside this news. But not now. She is going to press for fire safety & insurance to be followed to the T in her building.
Great! I thought as I hung up the phone and started reading about why we overlook Contingency Planning. I came across this interesting interview of Author Robert Meyer of the book The Ostrich Paradox – Why we underprepare for Disasters. He called optimism pretty dangerous – “excessive optimism is probably the most damaging one. The idea that triggers action is worry or fear over something bad happening to us, and if it never hits the radar screen, we’re not going to prepare for it. And so the more we ignore worst case scenarios, the more we think that bad things are things that happen to other people & not to us, the less able we are to prepare’’. (Read the full interview here: http://wwno.org/post/why-arent-humans-better-prepared-natural-disasters)
True said the author. We always assume that a calamity won’t hit us. If there’s fire, it would be in another building. If there’s theft, it would be in neighbor’s. If there’s accident, it would be another guy on the road, not us. Due to this, we never equip ourselves financially for the emergencies. However, there won’t be a sane financial plan, unless it accounts for an Emergency Fund.
What is an Emergency Fund?
An Emergency Fund is the pool of money that we keep aside for unannounced large expenses so that we don’t have to compromise on living expenses. Emergency could knock in any form like loss of job, major house repair, sudden ailment in family, unexpected travel. The fund should be easily accessible almost like cash since you may not have the time to access investments.
The fund should be 3 to 6 months of your monthly running expenses. For example, if your monthly expenditure is Rs. 1 lac, then Emergency fund should be between Rs. 3 to 6 lacs. Having said this, it is not easy to set aside a large sum just like that. It requires a bit of planning.
How should you create an Emergency fund?
To create an Emergency Fund, you have to do some math. A quick step by step will help here.
- Chart your monthly income and expenses: This must include the essentials like rent, fees etc. plus other discretionary expenditures like shopping, movie, eating out.
- Set your amount for the Fund:Consider the total of all essentials in a month. That total will give you a sense of how much you need to keep afloat in case of any emergency.
- Work out a Saving Plan: To accumulate a large sum, you need to work out a strategy. Evaluate how much is ok to keep aside every month and how long you need to keep saving to achieve the set amount.
- Put Emergency Fund in accessible place: The money should be available even at mid night if required. So you can partly keep it in cash, partly in a bank and some in maybe a liquid fund (more on Liquid Fund later).
- Stay on Track: You may have a festive month or new (school) session month which may prevent putting money aside but ensure that you are back to saving from next month on. Discipline is key in securing yourself.
I am doing Emergency Fund building for myself and can vouch for the peace of mind I have had lately. After all, it’s one life & those gloomy skies are better off at bay.