Need for an emergency fund
Recently I had to think a lot about this topic. Whenever we plan our financials, we have to make sure that we have enough funds set aside as emergency funds. I was looking for some considerations to keep in mind if I quit my job. One of the biggest considerations was to try and understand if I had enough money as an emergency fund. This is very important because anything can happen in the future. Not only for us but also for our family members. In that case, the medical insurance can cover only to some extent. We have to think about having other emergency funds so that our other financial needs are met.
In financial planning need for an emergency fund is always a mandatory thing. Whatever investment we do or any new opportunity we explore or even the expenses we do, it should always be after saving up enough money for an emergency fund.
Backup for running for a few months
Once a wise person used to tell me that the emergency fund should be in such a way that we keep accumulating money in such a way that if we lose our job someday, we have to do a calculation as to how many months we can continue with the savings. The money we accumulate shouldn't just be backup money that we won't be touching at all. What if there is a situation where we have to make use of the money we keep as backup? In spite of using that money, we have to check and see how many months we can make use of that money.
My friend started thinking about his retirement based on this. He was continuously accumulating money in his bank. With the money accumulated so far, he was considering how many months or years he can survive with the money accumulated. If the number is years is huge and the money is sufficient enough, then it is a good time for retirement. I asked him if his kids would need his financial support and for that, his answer was that after a certain age, the kids should find their own income source.
Emergency medical funds
It is also important to keep some funds as emergency medical funds. The other emergency funds can also be in the bank or locked in a fixed deposit. But the medical funds should usually be easily accessible. The reason is that when there is a medical need, we should be able to withdraw those funds easily and make use of them.
In countries like India, the citizens are not covered by any basic medical plans. Many people get insurance for themselves and they pay premiums for the same. Some people are covered with medical insurance sponsored by the company. If there is a situation where we quit a job and live with passive income or another source of income, we have to make sure that we get enough income that also covers medical coverage. If for example our current CTC is 30 thousand dollars per month and the medical coverage is around 5 thousand dollars, we have to make sure that our new job or the new earning opportunity is giving us close to 40 thousand dollars would include both the regular income as well as the extra medical benefits that we would have got.
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