Around September 2019, her husband Girish, who was the general manager in an airline company, lost his job as part of their corporate restructuring. By December 2019, Girish had found another job but it paid just 60% of his old salary. Then in Feb 2020, Nikita’s bank decided to cut staff by 20% and preference was given to old-timers. Obviously, Nikita had to leave. COVID-19 and the slowdown had clearly taken a toll on the family.
Why it created dire situation for Nikita?
One can safely argue that the COVID pandemic was unexpected but that is hardly any solace. The fact is that Nikita is out of her job and Girish had to settle for a much lower package. Girish was using most of his salary to run the house and pay the EMIs for the home and the car. He had some long term mutual fund savings but they were meant to fund the higher education of their daughter. She was already 12 years old and they could not take chances with her career. Liquidating those mutual funds would mean they would never be able to save enough to allow her to pursue her dreams.
Limited options in front of Nikita and her family
COVID-19 had really put them in a spot. Girish was already earning 40% less and that would call for a lot of cuts in their spending. Now Nikita had also lost her job and he entire plan of starting to save after 1 year had come to nought. Where did she go wrong? Clearly COVID was not within the scope of anticipation but ideally Nikita should have spent a chunk of her first year salary creating an emergency fund. That could have seen them through the tough period. At least, they would have time to put their finances in order without too much disruption. The answer would have been to focus on building an Emergency Fund equivalent to 6-months of monthly spending.
Emergency fund is just a back up for bad times
Most investors and financial planners tend to underplay the importance of an emergency fund. It is in times like COVID that the importance of an emergency fund really comes to the fore. While building an emergency fund, you must remember that this is not part of your long term wealth creation plan. The emergency fund is just a back-up that makes you feel safe during an emergency period. Had Nikita saved part of her salary and created a small emergency fund of even 3-months spending, they would have been less hassled.
How Nikita should have gone about creating the emergency fund
There are no hard and fast rules, but here is how to go about.
- Work towards a fund that can take care of your finances for a few months. In case you are salaried, it should be good enough to meet 6 months expenses.
- This is an emergency fund meant to meet emergency needs, not to support your lifestyle. So, this should have been the first priority.
- Liquidity should be the key. You don’t want to put money in stocks and realize the price is down 30%. The money should be ideally in savings bank account or a liquid fund. In fact, a liquid fund would be more productive and also tax efficient.
- Factor in inflation while building emergency fund and increase it periodically with each passing year. After all, even emergencies get more expensive with time.
The easiest way is to keep in a bank savings account. However, it may be hard to segregate and the returns are just too low. The other option is to park the emergency funds in Recurring Deposits. These are like FDs but you allocate an amount regularly. This is smart and entails regular allocation to your emergency corpus. However, tax efficiency is limited. Lastly, look at liquid funds. These are short term debt mutual funds invested in securities with tenure up to 91 days. Don’t take unnecessary risks on this money and go for an easily accessible liquid fund. It can be the best choice in more ways than one.
Creating an emergency fund can give financial freedom for women and their families. Above all, it empowers them to deal with any eventuality!