I was trying to explain the concept of having an emergency fund to a friend recently. While she understood what it is, she kept repeating this, “But I don’t have any emergencies I can foresee! My job is great, I have health insurance and I live a healthy life, so why do I need an emergency fund?”
She made a good point. Why do you even need an emergency fund if you are doing most things right?
When we hear the term “emergency fund”, we naturally think it is for emergencies which in India often means medical emergencies. While that remains the number 1 reason, there are other situations where an emergency fund enables you to do the right thing.
#1. Unexpected financial needs of close family members or friends
A member told us how she used her Scripbox savings to pay for medical treatment for her mom. Serious illness in the family can put them under tremendous financial pressure. Your emergency fund can provide a buffer in such a situation.
#2. Loss of pay due to any unexpected leaves of absence
Want to take some time off to care for a close family member? An emergency fund lets you take leave with loss of pay. You know that your day to day expenses will get taken care of.
#3. Your having to leave your job
Whether voluntary or a layoff, this is where an emergency fund can help you manage your expenses till you get the next job.
#4. Separation from your spouse leading you to move out of the home
Sometimes, some time away is what you need to put your relationships on the right track. Having an emergency fund helps.
#5. Accidents which lead to loss of your vehicle or damage to it
There are many instances where a total loss of your vehicle or significant damage to it might not be covered by your vehicle insurance. Having money set aside can help you soften the impact.
#6. Any act of God that leads to a loss of income or a financial loss – like a natural calamity
A few weeks back, due to heavy rain, homes got flooded from Chandigarh to Bangalore. That kind of damage to your possessions can take a big bite out of your finances.
Like all savings, the true purpose of an emergency fund is to give you the freedom to make choices - the right ones.