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Why you need a larger emergency fund in your 40s than in your 20s?

Some people make the mistake of believing that an emergency fund is mainly for those just starting their jobs or are still in their 20s or 30s or have young kids.

Many of you might know, what an emergency fund is. It is a fund that has enough money to see you through six months or about four months of your salary, in case of a loss of income or provide for unexpected, and urgent, large expenses.

Some people, though, make the mistake of believing that an emergency fund is for those just starting their jobs or are still in their 20s or 30s. By the time someone is in their 40s, the vast majority have a steady source of some income and are also experienced in managing expenses.

Quite a few such 40 something Indians, especially in the metros, are investing too. However, while many are investing for the long run, there is a sense that an emergency fund is not really a need. In fact, many have a quizzical look on their faces when asked if they have an emergency fund!

You might be prepared, but are you prepared enough?

Having investments doesn’t necessarily mean that you are ready for emergencies. Many of us have a tendency to not care much about uncertainties in life, especially if we have not experienced a negative event so far. The vast majority end up planning for a “steady-state” scenario where things remain as they are or that they get better. 

While being positive is great, being positive and prepared is better. The wise always leave enough room for uncertainty. 

Your 40s are when you likely have a family and thus, dependents. You are also probably paying off a home loan. Your expenses, now, are far higher than they were when you were in your 20s or early 30s.

You didn’t notice the rising expenses (though that’s unlikely!) because your income also rose. By your 40s you are likely to be in a leadership or middle management role earning quite well relative to your early years. This, sometimes high, salary tends to blind us to a scenario where we might not have this income, even temporarily.


What do your higher expenses imply?

Nobody wants to derail their life, financially or otherwise. For those in their 40s or 50s, with expenses probably at their peak, an emergency fund which is much larger than the one they had in their 20s or 30s is an absolute must.

You had the “luxury” of lifestyle flexibility in your 20s or 30s. A job loss at that stage normally meant finding another one in 3-4 months. This is no longer true, when you are older. In the event of a job loss, at your level, you might take longer to find another one. Your responsibilities are bigger and you are a person who takes them seriously. 

Bigger responsibilities and expenses (including your investments that you might be making every month), means taking more careful measures to protect your ability to carry them out.

What should you do?

The smartest and easiest thing is to ensure that at least some of your investments are in a liquid fund or even a bank account. This should be equivalent to at least six months of your expenses or whatever makes sense for your individual situation.  Make sure you have health insurance for your family and yourself. 

Ensure you grow this emergency fund in line with your expenses such that you always have at least six months ( more, if you are not very clear about potential expenses or your job role is not easily found in the market) worth of expenses in a liquid form (liquid fund or bank account). With great preparation, comes greater peace.

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