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5 things to help you build an emergency fund from scratch

Since the IL&FS defaults, it can be noted that NBFCs and housing finance companies (HFCs) were facing a crisis of confidence, sending call money rates higher and overall liquidity tight.Premium
Since the IL&FS defaults, it can be noted that NBFCs and housing finance companies (HFCs) were facing a crisis of confidence, sending call money rates higher and overall liquidity tight.

  • Often, we stash away little amounts of money in products or accounts that we stop accessing and eventually forget about it
  • If you are no longer in the formal workforce, then withdrawing EPF money can shore up your emergency corpus

Are you one of those investors who never bothered to put an emergency corpus in place? Or were you unfortunate enough to spend the money on an emergency just before the covid-19 crisis broke out? In either case, you may be worried now as the possibilities of a job loss or a health emergency loom large as the covid-19 pandemic rages on.

“In this type of situation, you need 12 months of living expenses, including EMIs, as emergency fund. If there are two earning members in your family, it can be for six months. If you don't have this, create it first. You can even stop some ongoing investment, till you create the emergency fund," said Melvin Joseph, a Sebi-registered investment adviser and founder of Finvin Financial Planners, Mumbai.

But instead of panicking, what can help you is looking inwards—towards your own resources. Often, we stash away little amounts of money in products or accounts that we stop accessing and eventually forget about it. Now is the time to take stock of each of these.

However, not all of these options may work if you are already in a dire situation and need money immediately. Here’s a checklist to help you in case you preparing for the near future.

Savings bank accounts

It’s not uncommon to have multiple bank accounts. Every time you changed a job in the past, you may have added another savings account to your list. Then, there are joint accounts with parents or other relatives that are often not used.

“Take stock of all your bank accounts and check whether you need all of them. In most cases, you don’t need more than two accounts. Close all other unwanted accounts and get the balance in those into your main account and keep it as emergency fund," said Joseph.

However, Suresh Sadagopan, founder of Ladder7 Financial Advisories, a Sebi-registered adviser, cautions that it may not always be easy to do so. “Some of my clients have dormant accounts in other cities. In the current lockdown situation, it may not be possible to withdraw money immediately, unless you have internet banking, which may not be the case in case it’s an old, forgotten account," he said. Reach out to your bank nevertheless and explore your options.

Gifted deposits

A lot of parents, grandparents or close relatives open fixed deposit accounts in the names of children and gift them when they are starting out on their own. Figure out if you have any such account or any deposit you may have made for your own short-term goals and add up to the corpus.

Some parents even like to put in a little extra in their children’s (who are minor) accounts as a buffer. “In extreme cases, you can look at the surplus you may have in a minor’s bank account, but this should ideally be used as a last resort," said Shashi Singh, a Sebi-registered investment adviser and founder, FinMyn, a financial planning firm.

Family gold

Traditionally, Indians like to invest in physical gold and often pass it on to the next generations. In olden days, the idea of accumulating gold was to ensure liquidity at the time of a crisis such as the present one.

If you are unable to reach your targeted corpus after exhausting all the above options, consider liquidating gold. “In extreme situations, you may consider selling a part of family gold to create an emergency fund," said Joseph.

You can sell gold jewellery pieces that you don’t use or you would have preferred to exchange in the past," added Singh.

Another option is to keep it as a back-up. Know that you would be able to liquidate this asset in case you were to face an emergency. In such a situation, it may help to get the value of the gold you hold assessed by an expert—you will at least be able to notionally add the value to your emergency corpus.

Old PF accounts

While the Universal Account Number (UAN) has now helped employees streamline their Employees’ Provident Fund (EPF) accounts, the earlier paperwork involved in transferring a PF account from one employer to another was not that simple. As a result, a lot of employees sometimes chose to forego the EPF amount if the savings were small to avoid the paperwork.

“Some people have old EPF accounts, with smaller balance accrued in the early part of our careers, which are not tied to UAN. Ideally, you should transfer the balance to the current UAN account, but in case you have an urgent need, you can withdraw the balance from those accounts," said Singh.

While EPF should be the last resort for tapping for emergency needs, a person can withdraw up to 75% of the corpus post one month of unemployment and 100% post two months of unemployment, he added.

If you are no longer in the formal workforce, then withdrawing old forgotten EPF amounts can shore up your emergency corpus and also help you spring clean your finances.

But again, if you need money in a hurry, this may not serve the purpose as the process may take time. Do remember though that the government has allowed covid-related withdrawals from EPF, and the money can be credited as quickly as three days (Click here to read more).

Taking a loan from parents or close relatives

Once you have exhausted all the avenues that you may have, you can consider taking a loan from your parents or other close relatives, especially if you need money immediately. “You can always borrow money from your parents or brothers or sisters which you can return when your situation improves. This has worked for a lot of people I know," said Sadagopan.

It may look difficult to build a corpus large enough to meet six months to a year of your expenses, especially as the value of your equity investments would have eroded given the current market levels. But if you take stock of some of the savings or investments that you normally don’t include in your asset allocation, you may find that you would not be in as big a soup as you imagined. Since some of these options may take time to deliver, start the process immediately even if you are not in an emergency situation right now.

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