Emergency Cash Gives You Mental Peace

Human life is uncertain. We never know when there will be an urgent need for money. Money in pocket gives you confidence and makes you feel more confident to face unexpected events.

But many of us are not prepared for the unexpected – we will not have enough money for during these situations. This is mainly because we live paycheck-to-paycheck (regularly run out of money before next month’s salary comes). We don’t set aside money for unexpected events. When these events happen, we will be forced to take debt which eventually makes it difficult to follow our budget. This is one of the common reasons why many people don’t do budget. Lack of emergency cash destroys the ability to live by budget.

In this article, we will discuss about the purpose of saving money for emergency needs and also how and where to keep the emergency cash.

Purpose of emergency cash
Emergency cash is the money saved for unexpected financial emergencies or unplanned financial obligations, without having to ask others for money. During emergencies, people rush to banks/friends/relatives to get money. The amount has to be repaid to the bank with high interest rate. So is the case with some friends and relatives.

Financial emergencies may come in the form of:

  • Sickness: Medical care has become very expensive these days. It costs hundreds (sometimes thousands) of rupees even for minor illnesses, seasonal diseases or fever. You will strain your finances when any member of your family falls sick. Also, when you fall sick, your sick leaves result in salary deduction.
  • Lost job: Even if you lose your job, you still have monthly bills to pay. It may be difficult for you to arrange money for living expenses, as it takes few months to find a new suitable job.
  • Vehicle repair: A small repair to your car needs thousands of rupees. Even bike repair costs considerable amount of money.
  • Home repair: A small renovation work to your home like, replacing a window, painting, new roof etc., will cost you thousands of rupees.
  • Financial emergencies: You never know when you will get an emergency call. You may have to visit a relative who falls sick, your friend may get married and you have to purchase a good gift, etc.

Emergency cash is useful for such kind of urgent or unplanned financial obligations which requires money to be paid on time.

Emergency cash must be liquid assets
To meet those unexpected financial obligations, you need to maintain emergency cash in liquidity. Many people confuse liquidity with fixed assets. Liquidity is different from fixed assets. Not all assets are easy to convert into cash. For example, land may be difficult to sell. Don’t save your emergency cash in non-liquid assets like employee provident fund, public provident fund and long-term fixed deposits.

Where to keep emergency cash?
You should consider maintaining emergency cash in a place where you can access it quickly. That means, you should be able to withdraw money easily in urgent situations. Emergency cash must be in near cash financial instruments like:

  • Savings accounts: Savings account is the best place where you can have easy access to cash at any time. Using debit or ATM card, you can easily withdraw cash anytime and anywhere. Open a separate savings account for emergency cash, because you shouldn’t use this cash for any other purpose other than an emergency need.
  • Fixed deposits: These accounts are quite liquid in nature. Though there is a period to get your money back, you can take out your money in case of urgent need by paying some small penalty for the premature withdrawal.

Remember, emergency funds must preferably be placed in joint names, under the “either or survivor” mode of holding. If anything happens to the account holder, the other person can have easy access to cash. Also, focus on safety when deploying emergency cash, and not the return on savings.

Minimum emergency cash you need to have
According to a global survey by a credit card firm ‘Visa’, people in India have less emergency savings. On an average, only 1.9 months of living expenses are maintained by Indian families, putting their family members at risk.

Your emergency cash must consist of 3 months’ living expenses. If you save for 6 months’ living expenses, then it is a decent saving. Some people feel more comfortable if they have 2 years of living expenses as emergency fund.

Emergency cash gives you peace of mind
Emergency cash not only allows you to cover those unexpected expenses but also gives you peace of mind and lets you enjoy life better. It helps you lead a stress-less life. Saving for emergency fund is the step before making investment for retirement/wealth creation.

It is a stress buster compared to additional anxiety, every time you think of a possible financial expense. Focus, therefore, on the quality of life and peace from having the emergency cash.

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