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If you need to use your emergency fund because of a job loss, how should you go about it?

Here’s an approach you can consider to make sure that you use this fund optimally, in the unlikely event you are forced into unemployment temporarily.

Saying we are living in unprecedented times is an understatement. While it pays to be positive and hope for the best, being prepared financially, for a difficult scenario ensures you aren’t caught completely off-guard. 

Considering the job losses happening on a global scale, now’s the time to be prudent and ready, no matter how improbable the scenario might seem.

Many of you, being the smart investors you are, have an emergency fund in place. It’s like the reserve we all hope we never have to use. But what if the improbable happens and you are forced to dip into this fund?

Here’s an approach you can consider to make sure that you use this fund optimally, in the unlikely event you are forced into unemployment temporarily.

1. Do not withdraw all the money from your emergency fund – do this first

The first thing is to find out how much you have in your bank account and how long will it last. You are likely to receive a severance package and other pending payments from your company, in most cases. So, depending on when it happens, you might not need to touch your emergency fund until a month or so.

This is also a time for you to reassess your financial needs and see what you can cut without it affecting your, and your family’s, overall well-being. This exercise is important to get a good idea of the actual financial runway you have. Consider all your debt repayments and non-negotiables like children’s school fees as well.

So what you need to withdraw generally will be your take-home salary amount which is Rs 80,000. You don’t need to withdraw the entire Rs 4 Lakhs. Assuming you invested this in liquid funds, you can use a systematic withdrawal plan set to a monthly withdrawal rate of Rs 80,000 as in the example shown.

2. Withdraw in a staggered manner based on your actual needs plus some more

Assume you have created an emergency fund worth four months of your salary. You had a gross salary of Rs 100,000, so this means you have an emergency fund of Rs 4 Lakhs at least. Since you paid taxes and EPF contribution, your net take-home used to be around Rs 80,000.

Now if we assume that you used about 30% of your income for debt repayments like your home loan and car loan, Rs 24,000 is your debt repayment and is non-negotiable. The remaining Rs 56,000 was what you used to finance your living expenses and savings. 

Now in this example, your accessible money was Rs 80,000 and this is really how much you need in a month at most in the immediate future. Your surplus of Rs 20,000 is an additional layer of protection.

So what you need to withdraw generally will be your take-home salary amount which is Rs 80,000. You don’t need to withdraw the entire Rs 4 Lakhs. Assuming you invested this in liquid funds, you can use a systematic withdrawal plan set to a monthly withdrawal rate of Rs 80,000 as in the example shown.

There will always be multiple variables that will change for different people depending on their needs. You can modify this approach based on your needs. Having health insurance (which is literally a lifesaver) and life insurance in place will help make you rest easy.

What about my investments – should I stop or continue?

While financial prudence suggests continuing your SIPs, reality can force your hand sometimes. If you accounted for your SIPs in the emergency fund, do continue them. If not, instead of stopping altogether, you can choose to simply pause them. Considering India is a growing economy and we are all resourceful individuals, we are sure you will manage to find something in a period of six months, which an effective emergency fund should cover.

What you should take away from this

1. Don’t withdraw the entire emergency fund amount
2. Figure out your actual needs first
3. Set up an SWP based on those needs so that your investment keeps growing when not used.
4. Finally, once you are back in a new job, replenish your emergency fund first before any other investment

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