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Four scenarios when six months Emergency Fund rule doesn’t apply

Most financial experts recommend putting aside six months of expenses or four months of salary as emergency funds. Afterall, it’s important to be prepared for contingencies that can be life-altering. However, this rule may not hold true for everyone. Here are four scenarios where this rule doesn’t apply and what you should do.

Most financial experts recommend putting aside six months of expenses or four months of salary as emergency funds. Afterall, it’s important to be prepared for contingencies that can be life-altering. However, this rule may not hold true for everyone. Here are four scenarios where this rule doesn’t apply and what you should do.

1. If you work in Specific Sectors

While 6 months emergency works well for most who have a job. With certain employees that’s not the case. Even though you get a salary every monthly, if you work in a sector that may potentially get affected by a slowdown in the economy, it’s best to have at least one year’s monthly expenses put aside for emergencies. This one year’s monthly emergency fund requirement becomes doubly important if both spouses work in such sectors. But, if one spouse is in a more secure sector, such as any public sector job, and has a good salary, a six months expenses as thumb rule is the right choice. 

Freelancers and those with irregular income have a “Famine and Feast” financial life. Which means there are months when there’s not much money coming in, while there are months when the income comes in huge chunks, only to be followed by some lean time again. 

2. Those with irregular income or Freelancers

Freelancers and those with irregular income have a “Famine and Feast” financial life. Which means there are months when there’s not much money coming in, while there are months when the income comes in huge chunks, only to be followed by some lean time again. 

This makes their emergency funds needs very different from those who earn a steady paycheck. Hence, it's imperative that you have a good amount of cash reserve kept aside. It’s important to keep one year’s monthly expenses aside. After all, you never know when you’ll need cash on hand, and when your next income will come. You never know when uncontrollable circumstances affect your work schedule, and you might not be able to work, for a bit. Unlike those who have jobs, and are entitled to get some paid leaves, you don’t get paid when you take a leave.

3. If you have gone over-board on debt

If you are in huge debt, go beyond the thumb rule. It doesn’t matter the kind of debt it is. Be it a good debt, like a home loan, or a bad debt like an auto loan, credit card debt or a travel loan. If you have over 35-40% of your monthly income going towards servicing various loan repayments- your situation is sensitive. If it’s much over the 40% mark, you are already in a difficult situation. 

It’s best to have a year’s monthly expense kept aside as a contingency fund. With the debt you already owe, there’s a good possibility, you might not get another loan as easily as you got your previous loan. So, what if an emergency happens at such a time, and you have no loan available?

Hence, make sure you have your emergency funds stacked up, up to a year’s expenses. And, do so even while repaying your debt aggressively.

4.  Single income and too many dependents:

If yours is a single income family, and you have too many financial dependents (for example if your parents and younger siblings also depend on your income apart from your spouse and children), then consider having a year’s expenses as emergency fund.

How to do it: Now that you know the scenarios when you need to bump up the emergency fund to 12 months, here’s how you can do it. Instead of keeping your money idle in a savings account where you earn 4 per cent paid by banks, invest the extra amount in liquid and ultra-short-term funds, as they tend to offer you better and more tax efficient returns. You can build the fund over a period, by using the SIP route. Some lumpsum cash received by Freelancers can be invested towards the building this corpus.

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