Here is a simple guide on Emergency Funds and why you need to get this ready before investing in equities or any other asset class.
Why Emergency Funds?
Life, at times, may bring up unpleasant situations where cash comes to the rescue. It could be an accident or a medical emergency, which might demand some money. If all the cash stays invested in equities or hard assets like properties or gold, then there might be occasions where you got to sell some assets to get hold of cash. This will also interrupt the compounding process of your assets if you disturb them by selling them off. Thus, before investing in stocks or ETFs, or hard assets, it is essential to have an emergency corpus built ready to deal with the uncertainties of life.
The Pandemic has rendered many without jobs, and thus, there might be a temporary loss of income until one gets a new job. So, simply put, emergency funds come in handy to handle life’s emergencies.
We need liquid cash readily accessible without locking them into a high-risk financial instrument.
As expressed by Vanguard — Emergency funds are essential to combat:
- Medical emergency
- Vehicle accidents
- Sudden repairs/theft
- Job loss
- Illness and other life’s uncertainties.
An emergency fund is a stash of money to cover the financial surprises life throws your way. These unexpected events can be stressful and costly. Here are some of the top emergencies people face:
- Job loss.
- Medical or dental emergency.
- Unexpected home repairs.
- Car troubles.
- Unplanned travel expenses.
Where to Keep your Emergency Funds?
People waste enormous time finding the best place to park emergency funds. Some even open a new bank account to get a few % high on their deposits. Sad to say that one of my friends had parked emergency funds by buying a corporate bond which shall mature after five years — meaning he cannot touch the corpus for the next five years, even in an emergency. The monthly payouts excited him to opt for such a…