The importance of building an emergency fund

The importance of building an emergency fund

There is a popular fable about the ant and the grasshopper. While the ant toiled hard during the summer, the grasshopper would sing and dance and mock the ant by asking: “Why do you work so hard?” But when winter came along, the tables changed. The grasshopper became miserable, it no longer sang and danced and mocked. How could it? It had no food, no shelter during the damp, cold nights. The ant, on the other hand, remained well-stocked. This story conveys that one should work hard when times are good because no-one knows what the future holds.

This is precisely the reason you should create an emergency fund. The kitty you build can be a life saviour in tough times. It can help you tide over family or financial emergencies, loss of job and other such personal hardships. This is why saving for the future should be the first step of financial planning. Building an emergency fund is not tough as you’ll realise when you give the article a read.

How to create an emergency fund?

Like the ant, you have to be zealous enough to set aside a part of your income every month, without fail. The amount you save will comprise your emergency fund. As we mentioned in the previous chapter, it is advisable to save first and then spend on your monthly expenses. This way, the creation of your emergency fund will not be risked by your bout of overspending. At least 10% of your gross monthly income should be saved in order to build an emergency fund.

Where do you park your money?

Stashing money in your house is not a good idea. You may be compelled to use that money for every inconvenience you face. Now the question arises: where do you keep your money for financial emergencies?

The options

• Life insurance

You can choose to buy a life insurance cover. A life insurance can safeguard your family in case you are not around. The value of your term insurance plan should ideally be eight to 10 times your gross annual income. This will ensure your family doesn’t face financial upheavals in your absence.

• Health insurance

A medical emergency can drain out your wallet. To worsen matters, healthcare costs are rising sharply in the country. A nationwide survey found that the costs are growing at over 10%, both in rural and urban medical facilities. Hence, a medical cover is of vital importance. You may have to pay a small premium every year. But, the larger picture suggests that’s a small price to pay. Also ensure you opt for a critical illness cover. This can protect your finances in case you are diagnosed with cancer, have a heart attack or are suffering a life-threatening illness. In short, do not look at the money you are spending on a medical cover. You should, instead, look to get the optimal coverage in your medical cover.

• Liquid mutual fund

Life often throws different curveballs at you. For example, you may lose your job. In such cases, you need money at hand. This is where a liquid mutual fund can help you. You will get two benefits. One, the fund can give you decent returns at minimal risk while you are invested. Two, you can withdraw your investment as and when required.

• Bank balance

Your savings account can be of help too. Try and keep aside at least two months’ worth of your income in your bank account. The biggest advantage of having cash in your bank account is that you can withdraw any time, thanks to ATMs and debit cards.

To sum up

Planning an emergency fund is essential if you want to sail through life without any financial difficulties. So, create a contingency fund and invest it in suitable avenues.


Prioritising goals

Investing money in different avenues can be a good way to earn higher returns in the future. By now, we know that investing is a good habit. But investing towards specific goals is a better habit. This way, you can concentrate on achieving real financial goals in your life within a certain time period. But what if you have too many goals? How do you achieve all of them?Let’s take Abhinav’s example. Abhinav has been working in an IT company for the past one year. He has just started investing his money. Right now, he has multiple financial goals for the near future. Here is his list of goals: Abhinav earns around Rs 45,000 per month. With his income, it is not possible to meet all his goals at the same time. Instead, it is always better to prioritize goals. In other words, some goals are more important than the others (at least for the short-term). By identifying the most crucial goals, it becomes easier to achieve all the goals at the right time.1) Create a listThe first step is to create a list of all the financial goals you have. This exercise helps you understand what you would like to achieve in the next six months, two years or even ten years. Remember to be as specific as possible when writing down the goals. This will help you arrive at a clear financial estimate for the goal. 2) Rank them in order of importance and urgencyOnce you have identified your goals, it is a good idea to rank them in order of importance. For instance, Abhinav may want to buy a sports car. But is the goal really that important currently? Paying off the college debt may perhaps be the most important financial goal at the moment. It is always better to clear off existing debts. There is no point in chasing lower investment returns (6-8%) when debt (20%) is much higher. It might be better to postpone a less important goal for a later date when the financial conditions get better. 3) Invest to achieve these goalsAfter identifying the short-, medium- and long-term goals, Abhinav can start investing to achieve them. For instance, creating a retirement fund is an important long-term goal that should not be ignored. Abhinav can start investing small amounts regularly in an equity fund through a Systematic Investment Plan (SIP) for this goal. Similarly, he can divide up his funds to invest in different avenues based on his requirements. 4) Reassess the list after a few yearsOnce he achieves a goal, he can tick it off the list. Every small progress is important. However, it is necessary to review the list once in a while. As people grow older, their goals and ambitions change. As a result, Abhinav needs to adjust his goals whenever necessary and invest accordingly.ConclusionGoals are an important aspect of human life. But not all goals are equal. As a result, it is necessary to prioritize them and work actively towards achieving them at the right time in life. This way, it is possible to lead a happy and fulfilled life (at least where the finances are concerned).What next?Most people have the habit of saving money. This is certainly a good thing. But guess what? In the current day, saving money is not enough. You need to do much more in order to beat inflation and achieve your goals.   DisclaimerInvestment in securities market / Mutual Funds are subject to market risks, read all the related documents carefully before investing.

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Why simply saving is not enough

How many times have you heard your parents and relatives say: “It is very important to save money. Don’t spend all of it.”That’s a very sage advice. But guess what? Simply saving money in a bank account is not enough. You need to go one step ahead. And that means to invest. Employing smart investment tips through a smart investment plan can make the difference between creating wealth and merely saving.Why simply saving is not enoughSavings can help you meet a few financial goals. But in order to truly build your wealth over the long-term, it is important to invest utilise smart investment ideas to make money. Of course, there is a risk of losing money in investments, such as a smart investment in share market. But as an astute investor, it is possible to manage the risks and enjoy high returns.How to make smart investment choicesHere are some tips you could follow to shift from saving to building wealth.Lower returnsWhen you save your money in a bank account, the returns you earn can be very limited. For instance, most banks offer around 6-7% on fixed deposits. The interest rate on savings accounts is much lower at 3-4%. And with inflation usually hovering between 4 and 5%, it is highly possible that your buying power reduces over time. In other words, your returns are eaten away by inflation.Potential growth from investingOn the other hand, there are many investment avenues that offer greater returns to investors. Mutual funds offer returns anywhere between 10-15% per year. You can invest in debt funds, equity funds, Exchange traded Funds (ETFs), balanced funds and so on. Investing directly in the stock markets can help you earn much higher returns annually. So, based on your risk appetite and financial goals, you can choose to invest in any of these options to start building wealth. Goal planning and investmentsAs you grow older, your financial responsibilities are bound to increase. Getting married and having kids can be emotionally wonderful. But it also means that your expenses start growing. Buying a new car, a new house, putting your kids in good schools and colleges are some of the major expenses that occur down the line.With a fixed income and limited savings, it may not be possible to do justice to all these milestones. However, by creating a proper financial plan and investing for the long-term, you can slowly but steadily create a large corpus of wealth. And one by one, you can meet all your financial goals on time.Start investing nowMany people wrongly assume that investments are only possible after you have saved a large amount of money. Yes, it is important to save first and then invest. But that doesn’t mean you need a huge amount to invest. You can start investing even with small sums of moneyMany mutual funds allow investors to investors to invest as little as Rs 500 each month through SIPs. Here, the important thing is consistency. By investing month after month, you can really see the difference over a period of time. As your income and confidence grows, you can increase your SIP. And as your knowledge of the market grows, you can branch out and invest in other avenues too. Stocks, futures, options and gold are a few possible avenues.ConclusionAs a young person, setting financial goals may be the last thing on your mind. However, that shouldn’t stop you from investing for long-term wealth creation. Remember, savings are good but investments are better. DisclaimerInvestment in securities market / Mutual Funds are subject to market risks, read all the related documents carefully before investing.

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