Should I use Emergency Fund in this crisis situation?
There are two critical steps in financial planning. One is taking a term insurance plan to secure your family and the second is to create an emergency fund which can be used on any unpredictable incidents. Currently, Corona virus is creating a serious impact across the world. There are fears about job losses, delay in getting salaries, business closures, etc., This would have a severe impact on your finances. Under this circumstance you might be thinking that Should I use emergency fund now in this crisis situation or are there any alternatives to utilize. We have provided how to create emergency fund and manage it earlier, hence we would not cover here.
What is an Emergency Fund?
In simple terms, this is the fund that would come to you handy when you are in need of money for any unexpected expenses. There are 2 types of Emergency Funds:
a) Short Term Emergency Fund: This type of fund is accessible to you immediately within few hours when you need money. This could be like bank FD as an example. Since majority of credit cards are offering a high amount of credit limit, this has become less important nowadays.
b) Long Term Emergency Fund: The emergency fund, which is accessible to you within a few days like 1 to 5 years time frame. This could be like bank FD, liquid mutual funds etc. This is generally required after you utilize short term emergency fund.
Generally it is adviced to invest such emergency funds in liquid funds, bank FDs or short term mutual funds.
Why you may need an emergency fund now?
Due to lock down almost all over the world, there is a severe panic about when the economy would come back to normal state. This is creating fears like job loss, salary cuts, reduced customers if you are running the business as the spending across the world has almost halted except for daily necessities like groceries, medicines etc.
Should I use Emergency Fund in this crisis situation?
The emergency fund is created to utilize during unpredicted situations and to utilize unexpected expenses. However, we do not know whether this crisis would be for 1 month or 3 months or 6 months. Hence, I would feel that one should utilize this emergency fund as a last resort in this global crisis. Here are a few tips you should try before using an emergency fund
1) Use 3 months moratorium on loan EMIs: Why don’t you utilize 3 months moratorium on loan EMIs? There are pros and cons to this. But if you are in fear of job loss / layoffs or think this crisis may continue, then you should utilize the 3 month deferment of loan EMIs. Yes, this would cost you higher as you may need to pay interest and principal after 3 months. If you still have questions on this, you can read our article on Do I need to take advantage about 3 months moratorium and defer Loan EMIs.
2) Cut down expenses: When I was chatting with one of my friends he was indicating what expenses to cut when entire lockdown is happening. Check your last 3 months of expenses. Cut down whatever you can. It could be reduction of electricity consumption, cut-down of new papers, reducing multiple mobile SIM connections, cutting down any rent paid for additional flats/houses (e.g. Children education or in luxury), pausing the retirement contributions you might be doing regular basis.
3) Defer certain expenses: I am not telling you to defer your credit card expenses which can cost you high. You can try if you can defer any expenses or payouts (e.g.handloan taken from friend, you can check if you can delay it) . When you see your expenses or payments list, you can figure it out if at all there are any such expenses.
4) You can withdraw EPF online as per the new rule in 2020: Few days back, there was a major announcement from Finance Minister where one can withdraw 3 months of wages or 75% of EPF corpus whichever is lower. We have written an article on the process you need to follow. You can take just a few minutes and withdraw money from EPF online. The money would be credited in your bank account in 2-3 weeks that can be used in this crisis situation.
5) Try for Hand loan: Taking a personal loan could cost you more. You can try for hand loans from friends or relatives if possible.
6) Close Insurance cum Investment Plans: I keep saying that one should consider only some of the best term insurance plans and avoid insurance cum investment plans. If you still have any insurance cum investment plans, this is the right time to take a decision.You can close all of them and get some funds. If it is not possible, you can take loan on such plans. Majority of the insurance companies give up to 75% as loan on such insurance plans.
7) Utilize your credit cards to get some credit period: I have several friends who have multiple credit cards and they use them on rotation basis based on the payment dates. If you need to pay any pressing expenses, pay them through the credit card and utilize the maximum credit period if possible.
8) Take Loan against gold: Since gold prices have increased now, if you have some gold at home, you can consider taking a loan against such gold. You can get a loan up to 80% of the value.
The above are not alternatives to the Emergency Fund. The idea of giving these tips is that, you should not use the emergency fund for next 1-3 months and break your head later-on for funds. You can try some of the above tips and delay using such emergency fund which can be useful when you are in a real crisis situation.
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Should I use Emergency Fund in this crisis situation