Why do you need an emergency fund in your 20s?
A few days back a company, called Better, did not act in a better manner and got rid of its employees without any notice and paid severance packages right away. This is the same company that, back in the month of December 2021, sacked its employees over a Zoom call with the CEO.
For most of us, still hustling and making ends meet in our 20s, it can come across as being horror in real life without any back-end cushioning, which in financial terms is called an emergency fund. With the post-pandemic changes in the workplace triggering Great Resignation, coupled with the current Russia-Ukraine crisis, inflation is predicted. With inflationary trends, the crude oil prices on a rise, the trickle-down effect on the common man will be nothing but adverse. Therefore, it is always advised to create an emergency fund to save from any such mishap.
We’ll be in a position to cover any unexpected expenses with a liquid emergency fund. Keeping the emergency fund, liquid, is the most important factor to be taken into consideration. Withdrawal of money with no delay is at the core of curation of an emergency fund.
MAGIC OF COMPOUNDING
To build an emergency fund, the accumulation is supposed to be gradual by setting aside a certain amount of money every month in a different bank account. With the wonders of compounding, you will witness a considerable corpus. For a corpus of Rs. 1 Lakh, setting aside Rs. 10,000 every month will do the job.
HOW MUCH AMOUNT SHOULD YOUR EMERGENCY FUND HAVE?
Based on your income and expenses, an emergency fund can amount to three to six months of your monthly income. In case your earning is Rs. 30,000 then your emergency fund can lie anywhere between Rs. 60,000 to Rs. 1,00,000. The funds can be bifurcated into long-term and short-term based on the type of your emergency with varying corpora.
WHERE TO INVEST YOUR EMERGENCY FUND?
Even though a bank account is an option to maintain the liquidity of your emergency fund, it is always advised to invest a portion of the amount short-term RDs, debt mutual funds spread across liquid funds. For people in their 20s, the emergency fund acts as a retirement fund from the brink. Wealth management is the new cool, but with wrongly driven intent. The misconception lies in the fact that only privileged folks need an emergency fund, whereas, that is where they start selling lies to emotionally driven youngsters.
It is the romanticization of the idea of not having a plan-b, as an act of bravery, that is when it’s actually necessary we hide faces behind our delusional world.
