One of the best personal finance concepts we’ve ever heard is of the ‘emergency fund’.
A good chunk of people disregard the idea of using emergency funds as an essential part of personal finances. However, they fail to anticipate its ultimate use during tight spots.
Emergency funds can become the first line Of defense against Financial Deficit
An emergency fund you build can be good resource when your cash money needs flexibility. It can be put to use when an urgent need arises and its almost unavoidable.
Here are the 3 main reasons why you need cash reserves
Ofcourse, life can be quite taxing emergency falls upon you. Unexpected spending doesn’t come with an invite, whether its accidental car servicing, urgent medical treatment or sudden mobile repairs.
- Avoiding Increasing Debt
Suppose, you don’t have enough cash available to pay your monthly EMIs or buy daily essentials during your struggling days, then it’s only an emergency pool which can save you.
You will be obliged to max out your credit cards with heavy interest rates or personal loans which can be even worse.
- Better Manage Investments Or Improve Economic Volatility
If you already have fair investments in place than its important to manage them properly remember nothing can be fairly predicated in life. After retirement, most elderly avoid being in a financial shell & therefor engage in liquidating their investments whenever there’s a fall in the face value.
This is not only a theory taken from the market but the term “volatility” is inclusive of when you’re actually running short of money due to gruesome circumstances.
Even when you own several properties, it’s likely that the prices may fluctuate & you lose some money that you may have taken into account. So with market volatility, its best to be careful than being over-confident about your actions.
The main question is how large should your cash reserves be? Should you at all depend on investments for your everyday lives?
- Safeguard Against A Job Change
A job shift cannot be avoided unless you have alternative options ready for you. Job changes are not always planned & can be difficult to pick as per requirement. As an ambitious employee, you may like to grow by quickly shifting jobs which could be as frequent as 4 times in 5 years.
Infact, unexpected layoff or termination is way more unpredictable & discouraging to a conscious job change. So, to cover up the gap you must have your financial preparations in place. if you take a voluntary exit, it’s best to prepare for the change.
Having an emergency fund can give you the surety to take up an independent career opportunity & create a financially relaxed environment.
Choose An Option That Fits Needs of Your Family
All mentioned pointers must be essentially considered but you may choose to have a definite savings target which fits good your family, in line of convenience & needs.
Importance of Cash Reserves During Retirement
When you’re retiring, you need extra cash reserves along with standard emergency fund, if you primarily plan to survive on your investments. When you already have cash reserves, you can live off on the cash instead of selling your investments straight away.
There are many intricacies of retirement planning, so better consult a financial expert on the best approach to follow in your specific situation.