Job Cuts: Prepare for the worst with an Emergency Fund
These are difficult times for employees, especially in India's information technology (IT) sector with pink slips flying around like birds during Spring.
With most people living paycheck to paycheck, losing a job can quickly turn into a nightmare if one hasn't factored it in as part of their financial planning.
Being out of job can be traumatic for each one now has multiple EMIs to pay.
Moreover, finding another job can take anywhere between one to three months, or more.
In such a situation, being financially stable can be of great help and will allow you to be at mental peace while you hunt for a new job.
Although there is no specific amount that one should be save as an emergency or a contingency fund, one has to factor in personal needs and family circumstances before arriving at a number.
This number (cash in hand, liquid funds like bank account) must include your average essential monthly expenses, such as EMI/rent, school fees, food and essentials, etc.
Ajit Narasimhan, Head - Savings and Investments, Bankbazaar.com, said, "As a rule, it is a good idea to have at least three months’ salary saved up as a contingency fund."
"Apart from this, you can still aim to provide for emergencies by taking adequate protection for yourself in the form of health insurance with a critical illness rider. This along with a term insurance and an accidental insurance policy will go a long way in providing you security," he said.
The Emergency Fund
If you do not have, set yourself a deadline for putting an Emergency Fund in place.
Set aside a fixed amount of money towards your emergency fund each month and consider it as one of your mandatory outflows just like your EMIs and grocery expenses.
Narasimhan said that while the savings account is a good place to start, the returns that most SB accounts provide are on the lower side. So you may want to investigate options such as liquid funds.
"Liquid funds provide average returns of 8%, which is higher than even most fixed deposits today. Moreover, Liquid Funds invest in Government treasury bills, money markets, short term corporate deposits and commercial papers. As all these instruments have very low risk, you can enjoy high liquidity. Moreover, there is no Exit Load," he added.
Most asset companies provide liquid funds with one-day liquidity. Some asset management companies (AMCs) even provide an ATM card to access funds.
So, instead of keeping your entire emergency fund in your savings bank account, you can keep part of this money in liquid funds, withdraw as and when you want, and earn extra returns in the process.
Money saved in this way can be used to cover EMIs, day-to-day expenses as well as emergency expenses until you find another job.