Asha, a physiotherapist by profession, attends to clients every day. She follows pay-per-session based payment structure and charges Rs. 500 per session. She works 5 days a week and earns on an average Rs. 60000 per month. Though she does not have a fixed salary per month, she has regular clients and good connections guaranteeing stable income.
She lives alone in Pune in a rented house. Since she is only 29 years old and has no dependents, most of her investments are in long term securities. Her salary distribution comprising of rent, household expenses, investments and savings account is shown in the graph below.
Come March 2020, in the face of global corona-virus pandemic and nation-wide lock down, Asha’s profession, being completely dependent on human contact, has been majorly affected. Like many others in present scenario, facing sudden unemployment, it has put a stop to her monthly income.
It is always advisable to have an emergency fund ready to deal with such situations.
How much amount to set aside?
The widely recommended practice is to keep an emergency fund enough to cover about 3 to 6 months of expenses. In Asha’s case, her monthly expenses include rent and household expenses which comes to a total of 35,000. Her emergency fund should be at least Rs. 1,05,000 and can go up to Rs. 2,10,000. This will take care of her expenses till the situation normalizes and she gets back to work.
In which securities can you invest?
The basic funda is to invest in securities from which the amount in the form of cash can easily be recovered for immediate use. Those securities are savings accounts and liquid funds. So, assets such as property and stocks cannot be considered since their value can be too volatile to be applied for immediate relief.
Gold as an alternative to emergency fund is a very common misconception amongst people. As seen recently, gold prices have fluctuated a lot. Also, your assets can become illiquid if shops refuse to accept the gold on days when the gold price is high. Moreover, you might have to sell your gold at a price lower than the current market price.
It is always a good practice to be prepared for any situation that might arise in the near and far future. For known and unavoidable expenditures like child’s education, child’s marriage and retirement one needs to invest for a long term. For foreseen but uncertain hazards like accident, death, illness, theft, etc. one needs to get insured. As for unforeseen and sudden events like unemployment which might impact an individual for a short term, one must have an emergency fund to the rescue.
Stay Physically Safe, Stay Financially Healthy!