Financial crisis does not come with a warning. You may be doing excellent in planning your financial future but a major accident or an unforeseen event could bring you back to square one. Chronic illness, major accident or losing your job can put cash inflow on hold which can turn your financial fortunes upside down. Saving for the future is a major goal but planning for a financial crisis is equally important.
Here we will talk about the easiest and most effective ways to prepare for a financial emergency-
1- Maximize Your Liquidity
The type of your investment depends on your goal. While retirement savings should be locked-in for a long time, the investments you make to tide over financial emergencies should be more liquid in nature. Invest in instruments where you incur no or less financial loss when you withdraw the sum prematurely. Fixed deposit is one such instrument. Before you invest, ask your bank whether the scheme has a lock-in period; in some cases rate of interest might also differ. For example, SBI fixed deposit rates and the interest rates on SBI ‘tax-saving’ fixed deposits are different. Tax-saving FDs have a lock-in period and would not be helpful in case of crisis as you cannot withdraw the sum before the lock-in period ends. On the other hand, regular fixed deposits can be withdrawn with a minimal penalty. Savings account is one of the most liquid places to keep money, however the rates may be lower.
2- Prepare a Crisis Budget
There is no point in starting out to save without a clear plan in mind. The quantum of your emergency fund will depend on your budget. Though it is not mandatory to prepare a budget, it never hurts to have a clear understanding of where your money is going. The emergency budget will also depend on your financial obligations and your risk tolerance capacity. For example, an individual who lives alone and does not have dependants will obviously need lesser emergency fund as compared to one who has to take care of his family. Prepare a simple monthly budget and then find out how many months’ worth of savings you need to cushion a financial emergency. In the above example, the single individual might need just three-month savings but the other person might require six-months or even a year’s worth to meet his expenses while maintaining the same standard of living.
3- Look for Alternative Sources of Income
In case you have some time left from your day job, you can take up a side job to earn some extra money. Though the proceeds from this venture may be minimal as compared to your primary job, it will make for enough extra money to add to your emergency funds. Do not get tempted to exhaust these earnings; add it to the crisis corpus. Small amounts saved will make a meaningful sum in near future. You may as well follow your hobby or passion to make an earning. Though it might not be very rewarding in financial terms, you will get emotional satisfaction. Any little amount you make will increase your emergency funds.
4- Cut down Your Credit Card Debts
What most of us do not realize is that credit cards are good only as long as you make regular payments. If outstanding balances are piled up on your credit card, it is doing more harm than good. You have to pay hefty interest on the amount that stays in your statement. So you should pay off your outstanding credit card debts before you start saving for the emergency fund. You have the option of getting a new credit card to which you can transfer your outstanding balance at a lower rate of interest. Some banks also allow you to convert your outstanding balances into EMIs. For example, HDFC Bank offers smart EMI feature on your transactions. You can call HDFC credit card customer care to get a bulk purchase converted into EMI. Paying off your credit card debts will reduce your financial obligations and allow you to build an emergency fund easily and quickly.
5- Reduce your Monthly Expenses
For the time you are saving towards the emergency fund, you should try to reduce your monthly expenses. Just cut down the expenses that you think are not necessary. Save on electricity bill and water bill by closely monitoring the usage. Close the accounts that you are no longer using but on which you are paying the maintenance charges. Another important thing to consider here is the penalty and late fee on different bill payments. Although the charges for delay may be minimal, they add on to your financial obligations. You can set standing instructions on your current account or your debit/credit cards for utility bill payments so that you never miss them. Set a date to review all your debt accounts and when the payments are due on them so that you do not miss out on any of these payments.
6- Get Insurance Coverage
Needless to say, an insurance coverage is important to provide you financial support in case of a mishap. A medical insurance will save your family from being financially broken in case an accident happens. You should look for a better deal at a lower cost. Shop around and find a good insurance company that provides you a considerable coverage at a lesser cost. Also, do not forget to read between the lines for hidden terms and conditions.
7- Do not miss out on routine maintenance
If you keep up with the maintenance on your house, car and even personal health, the small issues can be handled quickly and with lesser money. For example, taking your car for regular service will cost lesser as compared to the money you would have to part with in case a spare part breaks. The same law applies for your personal health- eating healthy is always better than undergoing a heart surgery. So keep up with the regular maintenance and everything else will fall into place.
8- Maximize the Value of Your Available Resources
More often than not, we do not pay attention to the things we can cash in, such as our credit card reward points, gift voucher or a discounted deal. You should keep track of your credit card reward points and redeem them before they lapse. Such rewards can be redeemed against gift vouchers, discounts or direct statement credit. You should also understand the offers on different credit cards and use them accordingly. Use the dining card to pay for your restaurant bills and earn extra reward points.
The whole point is that you have to prepare in a way that when a financial crisis strikes you do not have to utilize all your savings and investments towards it. Any financial emergency will only feel like a setback if you have saved enough for this day in advance. Life is unpredictable, so it is always in your best interest to prepare for the worst.
