Given the present circumstances, it won’t be a stretch to say that there may come a time when we may have to dip into our emergency corpus. What should you do then and how should you go about it? Find out here.
The COVID-19 pandemic has dealt huge losses to the world economy that will probably take countries at least a few years to recover from – widespread job losses, paycuts and furloughs. If things look stable for you on your job front, great! But if they don’t and you’re mentally prepping yourself for the turmoil that is to come, it’s wise to be ready. And by that we mean, having to dip into your emergency fund. In the event of a sudden job loss when you are forced to dip into your emergency fund, here’s an approach you can follow to optimally use your fund:
Start by calculating how much money you have left in your bank account and how long it is likely to last. If you’ve been laid off, your company would’ve likely given you a severance package and some other emoluments. Given this, you may not have to touch your emergency fund until this sum is exhausted.
Take this time to also assess your current financial needs and see what all expenses you can do without that will not affect your family’s well-being. Take into account non-negotiables like debt repayments and your children’s school fees. This will give you an idea of your financial threshold.
Additional Reading: 5 Investment Options For Your Emergency Fund
Let’s suppose your monthly gross salary is Rs. 1 lakh and you’ve created an emergency corpus worth four months of your gross salary i.e. Rs. 4 lakhs. Assuming a portion of your salary goes towards income tax and EPF contribution, your net take-home pay would be around Rs. 80,000. This is the amount that you would access to take care of your monthly expenses like loan repayments, living expenses and savings. Given this, in the context of your emergency fund, Rs. 80,000 is actually the amount you would really need to every month. The additional Rs. 20,000 should be considered as an added layer of protection.
Hence, the amount you will need on a monthly basis is your take-home pay i.e. Rs. 80,000. You don’t need to withdraw the entire Rs. 4 lakhs. If you’ve invested this in liquid funds, you can avail a systematic withdrawal plan to set a monthly withdrawal rate of Rs. 80,000.
This approach can be altered on the basis of your needs – for some of you who don’t have a Health Insurance or Life Insurance, the portion of the corpus allotted to different items can be modified.
Additional Reading: To Have Or Not To Have An Emergency Fund
If you were investing in SIPs before the job loss hit you and you’d accounted for it in your emergency fund, do continue them. However, if you didn’t and you cannot continue with your SIP investments for lack of funds, instead of stopping them altogether, consider pausing them for the time being.
Remember that an emergency fund needs to be accessed only for what it stands for – emergencies. Before dipping into it, figure out your actual needs first and set up a monthly systematic withdrawal plan that leaves a portion of your corpus to grow. Lastly, once you’re back in a new job, consider replenishing your emergency fund first before any other investment.
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