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You need to build an Emergency Fund

July 2017

July 17, 2017 | 12:30 | Dubai

How often do we set out to build a budget, start recording incomes and expenses, only to follow it for a few weeks and then falter? Little do we realize the critical outcomes of such a lapse. One being the interruption in a must-have for most middle aged individuals – ‘the build-up corpus for an emergency fund’. Most of us may think of the insurance policy as that but there’s a significant distinction. You need an emergency fund – even if you have Insurance.

 

Based on your insurance and other assets, a generally accepted rule of thumb is the emergency fund should be close to 3-6 months of your expenses. This is generally true for the salaried class and must be taken as the bare minimum – the requirement swells in the case of self-employed individuals.

 

This fund are meant to be easily accessible. So you need to ensure it is liquid (in cash or can be easily and quickly converted into cash). You’re options are keeping it in a savings account or a liquid mutual fund or even maybe gold. Do not invest this in a risky asset, like equity as tempting as the recommendation you’ve got maybe.

 

Keeping it handy can ensure you have funds to meet an emergency – a loss of job, a medical emergency where insurance may not be covering the illness, etc. As per Vanguard, these are some of the top emergencies people face:

  • Job loss
  • Medical or dental emergency
  • Unexpected home repairs
  • Car troubles
  • Unplanned travel expenses

 

In summary, an Emergency fund can help you

  • Move forward with confidence in tackling unexpected events
  • It brings in discipline, restricting impulsive spending
  • You need not rush in a financial decisions in case of an emergency and end up borrowing at interest rates which would falter you long term planning

 

It requires discipline but the efforts are worth it. To present a perspective, setting aside AED 100 a week will lead to a corpus of over AED 5000 at the end of the year. Try this for a start.

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