I ask this question to myself every month and thus try to save extra each month so that I will be prepared for financial emergency better than yesterday. For the last 2 weeks, I am asking this question to myself every day as India is battling the Corona Virus again. Now the financial emergency can occur in some of the ways like:
- Job Loss
- Accident thus you need hefty hospital costs and loss of income
- Untimely Death
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When we talk about financial emergency we always talk about job loss or untimely death. We take the emergency fund to tackle the job loss and term insurance for untimely death to have some money for the loved ones.
Now people might argue that for 2nd option you have health insurance, but what if the insurance company denied the claim and thus you have to find the cash in short notice. And what I have seen is that hospital bills usually go too much and thus every few people have that much amount of Health insurance. Though you might claim the insurance money later on for a health emergency one may not be able to wait because you need cash right away to start the treatment.
So that brings the question for me, that how should I prepare myself financially for multiple simultaneous emergencies like job loss, accidents and surgeries. One thing we might have to consider that an emergency does not come one after another, it can have a cascade effect that means two or more emergencies comes simultaneously.
For example, accident + income loss + expensive hospital bill, this can come simultaneously where you need to pay for the hospital along with that since you have taken leave for a longer duration there will be income loss as you are going for a loss of pay. Job Loss + Expenses, though this is the most common where you have job loss and you have to pay for expenses and thus if you don't get a job early that can affect in many ways like rising interest.
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Now we have talked about Emergency Fund which will be required in any case. We value liabilities like Bike, Home on EMI rather than saving first and paying it fully. The first thing after getting a job is to have an emergency fund which will last for 6-9 months expanses if you are out of a job today. I have touched on the emergency fund in one of my previous post Emergency Fund Basics.
Next is a social network. The importance of social network is huge because when you have a social network it does open the door to get referrals or recommendations which helps you to get to the interview seat. Though cracking the interview is up to you based on your skills and experience but getting the interview calls is equally important and thus which you can get using a good social network.
Have double insurance. Now we earn money so that we can enjoy life but what if the tragedy happens. So the most important thing is to have health insurance. As a salaried employee, I get insurance from my employer. But I also have insurance outside because the company's group insurance usually does not cover a lot of things. Also, it will benefit you when you lose the job, because of your employer's insurance lapses. So we should have health insurance, critical illness cover, life insurance and accident insurance. Because it's cheaper to have insurance rather than having that much amount saved.
Having credit cards with high spending. Now people might argue that keeping a credit card is bad. But the importance of having a credit card is that it gives you one 1-month of free liquidity. If you are not able to access your emergency fund by any chance then a credit card can help you big time because you get free one-month liquidity and thus in that time you can arrange the money.
This is what I have done till now to be prepared for a financial emergency. Now the next step for me is to have an emergency fund for a longer duration in form of assets. We usually invest money to get profit from it. But we should not blow up that full profit for our enjoyment. What we actually should do is to enjoy and save accordingly based on your present financial status. As of now, I have 1 year of an emergency fund, but I would like to grow that for 2 years and more. Now to beat the inflation, I will not keep more than 1 year of emergency fund in the Fixed Deposit but instead will invest in Mutual funds and other asset classes which can beat the inflation and in turn create wealth for me.