The word emergency does not require any explanation. It is a state, especially of need for help or relief, created by some unexpected event. That unexpected event can come anytime and if we could not handle that situation then the results could be drastic.
Most of the emergencies can be very well handled if we are financially strong. But what if our Financials are also in a bad shape? If we have not handled or are not managing our finances properly then situations like a job loss, medical expenses, or an emergency home repair, an unexpected change in your financial situation can be incredibly stressful.
The bills still need to be paid, the utilities need to stay on, and you need to put food on the table, so how should you cope with a financial crisis? This situation leads to more stress, and in turn health problems and we enter into a vicious circle.
We can handle these situations very efficiently by taking few steps and plan our finances to manage uncertainties. Few are as under:
1. Understand your finances
Before starting it is very important for you to understand your financials thoroughly. This includes your Regular income like your salary or business income, or Irregular like interest, dividend and bonus Income. Discretionary Expenses like going out for dinner/movie, weekend breaks etc. ornon discretionary expenses like Grocery, children school fees , monthly bill payments etc. Real Assets like Gold and Real estate or Financial assets like investments in stocks, Mutual funds, Bonds, bank Fixed deposits etc. and all Liabilities which includes all loans including your credit card dues.
2. Understand emergencies:
Life is uncertain and so is the economic scenario. Thus we are encompassed with many situations which could lead to emergencies. Health Issues which may lead to hospitalisation or a regular treatment, Job loss and the time taken to find new job, uncalled events like accidents which may create a third party liability or natural calamities which could hamper your working and living for some time. Family members can be into emergency due to untimely death of the breadwinner and that too with many unpaid loans. All the above and many other things you can think of which require immediate financial attention should be properly taken care by adequate financial Planning.(Also Read Financial Planning case Study)
3. Design Solutions:
Though all the emergencies cannot be figured out and planned for but yet we can arrange our finances in such a way so that we can either provide for such emergency or be ready to face any. Some are mentioned as below.
A) Do Financial health Check up
- Keep at least 6 months of your family expenses including your monthly EMIs liquid in your saving bank a/c or in Liquid Mutual Funds. Depending on the economic scenario and the sector you are working with you may increase this amount.
- At least 15 percent of your portfolio should comprise of liquid Assets which means cash and financial assets, that is, you should be able to sell them off at a short notice and convert it into cash.
- Your total debts should not increase more than 50 per cent of your total assets.
- Your Monthly EMI payments should not be more than 30% of your Monthly income, with home loan this figure could be 50% but not more than that.
B) Transfer the risk:
Its always better to transfer some uncertainties to the insurance company to avoid them getting converted to emergencies later. Take adequate sum assurance of Life, Health, accident, Critical illness, home, motor etc. and other necessary Insurances.
Just like a blood lipid profile tells you about your good and bad cholesterol level in blood and determine the risk of coronary heart disease,so the financial health check up helps in maintaining the risk and liquidity to the adequate level in your financial profile to help you cope up with the emergency. It always pays to be planned.
[…] 6. One of the most important reasons for need of emergency fund is sudden loss of income. If you or your spouse loses a job , you still have bills to pay and it may take few months to find a suitable new employment. (read -managing Financial emergency) […]
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