Spend less, Save more and hope for the best. Well, yes but not exactly. Covid has left many Businesses and firms bankrupt, leaving millions of employees jobless. News of Recession and Economic downturn is all around. And no one knows, how long the Economy is going to take to recover or will it even further go down! While we agree its a tough time, nevertheless every tough situation has some thing important to teach us.
One thing Covid teaches us is the Importance of Emergency Fund. It echoes clearly that Emergency Fund is a must. So What is Emergency Fund?, Why everyone should have it?, and How?.
What is Emergency Fund?
As the name suggest it’s a fund set aside only to be used in an Emergency. So can you use it to buy the next new iPhone?, or that fancy Car down the road? The answer is obviously not! It’s the amount only to be used when you have no other source of Income coming in. When you can’t manage your expenses, and is being laid off or became victim of a crisis like Covid.
Why everyone should have it?
Yes, you heard it correct. Not just Individuals, even a Business needs to have some sort of Emergency fund to safeguard its employees and help the Business survive the Crisis by being able to pay off all the basic minimum expenditure. That is not to say, Business shouldn’t look for alternative or cut costs. A healthy Business is the one who is capable of doing it all. Surviving a Crisis is not easy especially if you are operating in a sector that is being hit hard (for example – ‘Theatres’, ‘Cinema Halls’, ‘Gyms’ and ‘Restaurants’ in current Covid19), but having the reserve cash set aside to meet the basic minimum of your operational cost and other expenditures for a period of 3 to 6 months gives you enough time to think with clarity and plan for better handling of Crisis or even turn it into an Opportunity.
For Individuals ‘especially’ keeping aside the Cash can keep their Stress at check, and help them be better prepared to cope with Crisis. Emergency fund won’t give you a lavish lifestyle or won’t guarantee you funding for the period till the Crisis resolve, you will still have to think of alternative, but it will give you enough Mental Peace to be able to focus on the next steps.
How to have it?
Now that we have established the importance of Emergency fund/Reserved cash for Crisis, you may be wondering how can one have it? Well the answer is pretty obvious Save 3 to 6 months of personal expenditure in a separate account that you can’t touch unless until its an Emergency! Yes, there is no secret sauce to it. You need to, you must Save, Save before you Spend, Save before you Invest, In fact don’t start Investing unless you have the Emergency Fund setup. After all Money is a tool and if it can’t get you peace, it is useless.
All the fancy items can be bought back later, first you need to live below your means and get the Fund setup. It is an essential first step towards your Financial Freedom. And if you already spend more than you earn than by all means either Earn more or Spend less!
Thanks you for Reading. For more such Financial Tips, follow riteFinance. Happy Saving…