COVID19 and its spread across the globe has forced individuals to accept change. It has also brought in the realisation that very little of what affects our lives is really within our control. The biggest example of this is the forced job losses as a result of sharply lower demand thanks to lockdowns in cities across the globe. The global travel and tourism industry alone is estimated to see 100 million job losses in 2020.
Even senior executives who have been in the workforce for 10-15 years realise that their jobs are not secure. A job loss or pay cut hurts even more if you don’t have an emergency fund to fall back on while monthly cashflows slowdown. Is it too late to build that emergency fund or should you do it now?
An emergency fund is basically money kept aside for a rainy day. Ideally, at least 6-12 months of expenses including your housing loan EMI or rent should be part of this emergency fund. It's money that can be kept aside in very low-risk deposits or mutual funds, to be accessed only in case of an emergency. Loss of income, thanks to the current recessionary phase, easily qualifies for such an emergency.
If you don’t already have such an emergency fund, despite lower income or no income you can even now start to think about building it. However, the later you do this in life, the harder it gets.
As a first step, estimate what your monthly mandatory expenses are. These will include, cost of your house, utilities, groceries, payments to your house help, children’s education cost and any medical-related expenses. The sum total of these expenses is what should be available in your emergency fund. Plus, you will have to add other one-time expenses like mediclaim premiums, car insurance and sundry other payments you may be faced within the year.
How can you build one now?
Start by taking stock of your other investments; money invested in equities, mutual funds, in gold, in savings certificates and the various insurance premiums you are paying. Ideally, don’t use your long-term assets for filling in the emergency fund.
As a first step, estimate what your monthly mandatory expenses are. These will include, cost of your house, utilities, groceries, payments to your house help, children’s education cost and any medical-related expenses. The sum total of these expenses is what should be available in your emergency fund.
If you have accumulated many insurance policies over the years, have a look and see which ones you don’t need; other than a good term insurance cover, you don’t really need any life insurance products. Clean up your investment portfolio, rid yourself of unwanted life insurance policies and pull out the old savings certificates due for maturity; all these can add to the extra cash flow towards building an emergency fund.
Once the above is done, relook at your expenses and start cutting back. There is a lot you can trim in your utility bill and even in the grocery bill.
This is not as easy, as you get used to a certain kind of lifestyle. Unfortunately, in an uncertain economic environment, where the next job is not visible for a few months, you have to take harsh decisions and make compromises. If you have two cars, for example, think, do you really need both, selling one will automatically release cash, which can be added towards your emergency fund, plus it reduces your fuel expenditure too.
As a last resort, you may think about moving to a more economical house. This could mean selling the place where you live and instead of paying a lower monthly or if you already rent, then it could mean moving into a smaller apartment or house.
These are ways to accumulate savings to help you through dark patches without taking on the burden of a loan or interest payments. While taking a loan sounds simpler, it can get you into a debt trap which is avoidable in times where income uncertainty is high. Focus on building your emergency fund and keeping expenses low till you can get back a more certain income inflow.