India’s leading IT company Tata Consultancy Services (TCS) has recently announced plans to reduce its workforce by 2%. This figure indicates the loss of more than 12,000 jobs. The IT bellwether’s move has created a wave of concern not only in the Indian IT sector but in the corporate world as a whole.
The company has made it clear that these layoffs are not due to the impact of AI disruption but due to skill mismatch and a change in business priorities. However, it is also clear that now there is no guarantee of stability of jobs in any sector. In such a situation, the need and relevance of emergency fund has increased more than ever.
What is an emergency fund and why is it necessary?
An emergency fund is a financial cushion that helps you in times of uncertainty and emergency like a job loss, medical emergency or family crisis. It helps you and your family meet monthly needs without resorting to borrowing.
How much emergency fund is enough?
Our house view is that you should have an amount equivalent to at least 12 months of essential monthly expenses as an emergency fund. These essential expenses are those that cannot be avoided under any circumstances – such as house rent or home loan EMI, cost of ration and medicines, utility bills like electricity, water and internet, children’s school fees or tuition fees and premium of insurance policies taken for you and family. This amount not only maintains your mental peace, but also helps you get through difficult times without debt.
Where should you keep this fund?
The most important aspect of an emergency fund is that it should be absolutely safe, and immediately available, i.e., you should be able to access that amount whenever you want, without any hassle or loss.
Therefore, it should be kept in investment options that offer high liquidity and have zero to very low capital risk. The best option is a savings bank account or short-term redeemable fixed deposit with a bank like State Bank of India. Remember, we are aiming for extreme safety here.
You can also keep some money in liquid mutual funds. Select carefully. Opt only for liquid funds which are 100% invested in short-term government bonds and/or AAA securities. Avoid liquid funds that aim to maximise returns by taking on more risk.
What to do if you don’t have an emergency fund now?
1. Immediately create a budget and prioritise expenses
First, make a complete list of your expenses and divide them into two categories:
Necessary expenses: like rent, ration, children’s education, electricity and water bills, mediclaim premiums, etc.
Discretionary expenses: like eating out, online shopping, vacations, expensive gadgets, etc.
After this, stop the non-essential or discretionary expenses completely for the time being and think of ways to reduce the necessary expenses. This is the first and most important step towards creating an emergency fund.
2. Withdraw money from investments that you should not have made in the first place
If you have taken insurance plans, endowment policies or racy mutual fund schemes that are either not performing or were not suitable for you to begin with (but you ended up investing in anyway), then review them.
Make partial withdrawals from Unit Linked Insurance Plans (ULIPs), traditional insurance policies which have low returns.
Use this opportunity to clean up your investments. Hopefully this will yield some cash flow for you.
Remember, the goal here is to try and protect your future as much as possible while providing for the current situation.
3. Cash out gold-silver or other physical assets
If you have been investing in gold or silver, well, this is what that investment was always meant for to begin with. To help you tide over tough times. Do not hesitate to liquidate some of your holdings. This is a very practical solution, especially when your need is immediate.
If you do not want to sell, then gold loan can be a good option. Its interest rate is also lower than personal loan or credit card loan. Having said that, as a thumb rule, avoid loans as much as possible. If there is no option at all, even then, maybe reach out to family for interim help.
Apart from this, if you have a plot or other property, then you can consider selling it or renting it. The predictability of a rental income stream could be very helpful.
How to make a financial plan after losing a job?
Step 1: Restrain expenses
-Immediately curtail auto-debit services, such as OTT subscriptions, club memberships, gyms, etc.
-If you have EMIs running and the source of income has stopped, then find out the possibility of EMI moratorium from the bank.
-Non-essential expenses like eating out, going to movies, festival shopping should be completely stopped.
Step 2: Prepare monthly cash flow
-Use a spreadsheet or mobile app to see what your monthly expenses will be in the next 6 months.
-How much money will come from where — like EPF withdrawal, old FD or help from family.
-How much will be spent where — mandatory expenses like EMI, ration, school fees.
-If you have started SIP, PPF or other voluntary investments, stop them temporarily.
-This planning prepares you mentally for what the next step will be and how long you can manage with the existing funds.
Step 3: Find alternative sources of income
-Losing a job is not the end. Sometimes it can also be an opportunity for a new beginning. In today’s digital age, there are lots of opportunities available for earning. Here are some of them:
Freelancing: Numerous projects of content writing, graphic design, web development etc. are available on platforms like Fiverr, Upwork and Freelancer.
Online teaching: If you are strong in a subject, do online tutoring.
Consultancy or training: If you are experienced in an industry, you can create a source of income through consulting or skill training.
Mental health and emotional planning are also important
In the face of job loss and financial strain, one lesson from this is that not only financial security, mental strength is equally important. Talk to your family and friends. Don’t blame yourself. This is a phase that will pass. Also, spend this time improving your skills.
Disclaimer:
FinancialExpress.com does not endorse any specific investment instruments. Readers are encouraged to make their own informed decisions, as any losses incurred will be their sole responsibility.