A financial crisis can strike at any time without any warning. For example, the prime breadwinner could suddenly lose their jobs. The COVID-19 pandemic has seen many people laid off by companies globally. Secondly, there could be a medical emergency at any time. A significant majority of Indian households experienced it during the second COVID wave in April 2021. People were forced to spend lakhs of rupees on the medical treatment of their loved ones. The pandemic had plunged almost the entire nation into an economic crisis leading to a financial emergency. So, let us discuss various ways to survive the situation and come out of it.
The COVID-19 pandemic has made each of us wiser and thus, realize the value of saving money for troubled times. Here is how every household should go about handling financial emergencies.
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Build up an emergency fund.
The critical aspect of building an emergency fund is drawing your monthly income and expenses budget. It lets you know your disposable income, which can prove beneficial in deciding how much you can save.
We recommend you sit down with the entire family when drawing the budget. The whole family includes your children and parents because they too have their needs and wants.
So, you list down the income on the right side of the sheet, while the left side takes care of the expenses. Your utility bills and groceries usually top the expenses list. Next comes your fuel expenses. Next, note down your loan liabilities. The children's educational expenses and parents' medical expenses are also expenses you cannot ignore.
So, if you have a balance of income over the expenses, it constitutes your savings. Keep some money aside for unexpected medical expenses. The rest of the funds go into your easy access savings account. We recommend you earmark some portion of this money towards creating an emergency fund that no one will touch unless an emergency arises.
Know your wants and needs.
The right way to deal with an economic crisis is to know your wants and needs. Of course, you cannot dispense with your needs because these expenses would have to be incurred anyway. But, you can cut down on your wants, resulting in enhanced savings. For example, yearning for a new iPhone is a want but paying the phone bills of your present smartphone is a need. Therefore, reducing your wants is a sure way of saving money. You can also term it as easy-access savings. These savings can form a critical aspect of building up your emergency fund.
Know how much emergency funds you need.
We discussed building an emergency fund and reducing your wants. The question is how many emergency funds you need to weather the economic crisis. Ideally, an emergency fund equal to six months of your expenses should be sufficient. However, if you have a stable job like a government or a high-level corporate posting, you can settle for an emergency fund equal to three months of expenses. If there is no other earning member in the house, the emergency fund should be around twelve months of expenses.
Have adequate insurance.
A crucial aspect that hit Indians hard during the COVID-19 second wave attack was that most households either did not have any medical insurance or the health cover was inadequate. As a result, people had to dip into their contingency funds like their PF and other retirement funds to weather the crisis. Rebuilding the emergency fund can take substantial time.
So, we recommend every household member should have adequate health insurance. Secondly, the prime earning member should have a term insurance policy that should cover all the loan liabilities and still leave some for the family to lead a decent life.
Explore other avenues of earning money.
Today, you have various avenues of earning passive money. Every household should explore these options as the income generated from such avenues can go into building the emergency fund that could help tide over a financial emergency. In addition, some of the passive income opportunities could be quick earn money schemes. So, we advise people to verify the income source properly before trying out ways of earning passive income.
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We have discussed six ways to overcome an economic crisis. Each of these avenues has its merits and demerits, but there is no denying that an emergency fund is crucial to tide over a financial crisis. At the same time, having funds parked in an easy access savings account can prove helpful for all family members to use it wisely.