A fund of one’s own Worried about how to save for an emergency? Don’t worry, we have a plan
By Ahtasam Ahmad
O
ne imagines many emergencies that might happen to them in their personal lives. A car crash, a roof collapse, a stampede, a wild tornado - anything could happen at any moment that could result in a person’s life or livelihood crashing down. After all, how many of us could predict that the coronavirus would wreak havoc on the world as it did and cause colossal economic damage as well as the huge impact it had on global public health? The hospitality sector and the transport industry, two businesses considered ‘safe’ were suddenly humbled and brought to their knees by the force of the pandemic. The disruption sent shockwaves into economies across the world and ours was no different. From large corporations to individual households - everyone was impacted. In Pakistan alone, more than 50% of working people reported that they were either fired or that their salaries were cut. At times like these, when the unexpected happens, what comes in handy are emergency funds. The idea of an emergency fund elicits many kinds of responses. The first is an overly simplistic one. No, an emergency fund is not a piggy bank you’ve been putting money in or a drawer you’ve been setting aside a certain portion of your salary in each month. The second
PERSONAL FINANCE
response to the idea of an emergency fund is intimidation - because there is very little understanding of what these funds are and what they do. Profit brings you a detailed guide on how to create a personal emergency fund and where to place it.
What is an emergency fund?
A
n emergency fund is the money you set aside to meet unexpected expenses that result from financial emergencies. This fund is not to be used for leisure, like buying a new phone or a playstation rather it is there to meet expenses that are unavoidable. e.g. If you lose your job or there is a medical emergency then you can draw onto your emergency fund for help. Getting health insurance or life insurance can serve as an emergency fund for a health scare. However, not everything can be insured and that is where one needs immediate cash to bail themselves out. It is critical to understand that having an emergency fund is extremely important as it will help you float the downs in your life and save you from decisions made in desperation e.g. going to a loan shark for money as banks won’t lend you because you are jobless. A fund should be equivalent to at least six months of your needs, and no, getting
that pair of sneakers is not a need. To better understand the situation let’s take an example of my friend Talha who has a monthly salary of Rs 60,000. The monthly expense of Talha is classified into 3 categories; Needs, Wants and Investments. As mentioned earlier, we will only be looking at needs to include in the emergency fund. Rent, Utilities, Groceries and Insurance Premium all are categorized as needs as these payments are unavoidable, probably can be reduced a bit, but for sure cannot be eliminated. Combining all these, we have an amount of Rs 240,000 that Talah needs to raise to create an emergency fund. But the next question is how? Like at the end of the month there is no spare money left, all of it is exhausted. This is probably the reason why most people don’t create an emergency fund. They don’t see any utility in tightening their budget for something that is unforeseen, but you are not totally to blame for it. As per studies, When you think about your future self, your brain can not relate to that person and as a result couldn’t care less about it. Coming back to Talha’s example, you can see that out of his total monthly salary, Talha expends around Rs 20,000 on personal expenses and investments. Now the dilemma here is that talha wants to invest and it is a good thing but the investments are of no use if you can’t use them to meet your emergency.
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