Contingency plan may fail, have emergency fund

Most people have some sort of contingency plan to deal with emergencies such having an insurance cover, taking financial help from friends and relatives, using loans and credit card etc. However, there are many situations when these options may not be enough to help you in handling the emergency successfully. This is where an emergency fund will help. When your dependable options may not workWhen insurance may not work: Not every aspect of your life is insurable. Even if you have an active medical insurance there are many medical emergencies which may not be covered under it. Most of the health insurance policies have many medical conditions which are on the list of exclusions against which there is no insurance cover available. Even in the list of diseases that are covered, many have a waiting period of years. Sometimes the total cover may prove to be inadequate to treat a serious illness. When credit card may not be of much help: Some people depend upon their credit cards to handle emergencies, however, there are many situations in which it may not work. In some situation the credit card may not be accepted as a means of payment. If the desired amount is big, your credit limit may prove to be inadequate. In case of economic downturn or a sector specific economic stress, the credit card issuer may cancel the card or reduce the credit limit significantly. Further, if for some reason you are not able to pay your credit card bill, then it can prove to extremely costly due to the interest charges and fees applicable. Limitation of friends and relatives: Most of the times it is a family member, relative or a friend who chips in when you need emergency funds. However, if it is a big amount, this option may not prove to be effective. There could also be scenarios when your rescuers may themselves be facing a financial stress. So, it is better to have your own dependable savings for the rainy day.What happens if you are not prepared?Loss on breaking investments: While planning for long-term financial goals, people lock their investments into long-term products. In case of an emergency, if you break your investment, you may end up paying penalty such as in the case of fixed deposits. In case of market-linked investments like equities, the timing may not be right to make an exit, which may lead to substantial loss.Costly credit card expenses: If you use your credit card and situation prolongs where you are unable to clear the dues, you may end up paying huge interest which could go up to 36% to 42% annually. High interest cost often leads one into a debt trap where people borrow more to pay off previous debt and interest.Costly personal loans: If you decide to go for a loan, then it is likely to be a personal loan which is one of the costliest loans. The sense of urgency will reduce your bargaining power to find and negotiate the best rate. The undesired financial burden of emergency is further aggravated by this high interest cost.Stress in relationships: If you have an emergency fund to deal with such a situation the only challenge will be dealing with the core issue. However, if you do not have an emergency fund, the urgency and desperation to arrange the funding may create stress in many relationships.So, if you have an adequate emergency fund it will not only help you in dealing confidently with many of the emergencies of your life but also save the high borrowing cost. Besides it will not let such emergencies derail your long-term saving and investment for other financial goals. How big should your emergency fund be?While building an emergency fund, one should keep aside 6-9 month worth of family expenses. Also, the primary objective of your emergency fund is to help you when you need it the most without any delay. While some emergencies may give you a few hours or days to prepare, others may require funds immediately. Therefore, the avenues you use to park your emergency fund should be highly liquid and easily accessible. Click here to read where you should invest to build an emergency fund.

from Economic Times https://ift.tt/3kFTNIy