Which financial tool is most suitable for different types of emergencies?

Hailing from a lower-middle-class family in a tier-3 town, Sachin completed his Master of Computer Applications course and began working at an MNC in Pune. Through countless hours of hard work and dedication, he made it to a senior-level position and found himself posted in the US, along with his wife and two young children. The family was living a charmed life till COVID-19 made its presence felt on a global scale, and like many of his Indian peers, Sachin was forced to move back to India after losing his cushy job.

It was an emergency unlike any he had faced before – given the unexpected loss of his job and an unpremeditated return to India, he was left without any potential prospects. His children needed to continue their schooling, and he needed to continue paying the equated monthly installments (EMI) for the house he had purchased back in India, without any monthly income.

As he re-entered the congested job market in India, three tools enabled him to manage his emergency situation in a comparatively hassle-free manner – his emergency fund, credit card, and a personal loan.

Decoding Emergency Funds

An emergency fund is a dedicated savings reserve designed to cover unforeseen financial expenses or emergencies, including sudden car repairs, medical bills not covered by insurance, or unexpected job loss. Having such a fund is crucial because it shields you from having to rely completely on credit cards or loans, which can lead to long-term debt and financial strain.

To build an emergency fund, start by setting a goal based on past expenses. Even saving a small amount regularly can provide significant financial security over time. Typically, an emergency fund should consist of the amount you would require for 6 months of expenses, without the expectation of any additional income.

Consider strategies like setting up automatic transfers from your paycheck or saving a portion of windfalls like tax refunds. Monitoring your progress and celebrating milestones can help maintain motivation. It is advisable to keep your emergency fund in a safe and accessible place, such as a separate bank account, flexi-deposits, and liquid funds, to ensure it is readily available when needed.

Establish clear guidelines for what constitutes an emergency to avoid dipping into these funds for non-essential expenses. If used wisely, your emergency fund can provide peace of mind and financial stability during challenging times, allowing you to recover while you navigate the circumstances. For Sachin, his emergency fund went a long way toward covering his EMIs and the expense of relocating to India and rebuilding his life here.

The Credit Card Equation

While his emergency fund covered basic necessities, Sachin chose to leverage his credit card for purchasing required household items and paying utility bills. A credit card, often referred to as plastic money, serves as a valuable tool in emergencies by providing a convenient line of credit up to a predefined limit. It allows users to make purchases and payments instantly, based on factors such as their credit score and income. This financial flexibility can be crucial during unexpected situations, offering immediate access to funds without the need to carry large amounts of cash or wait for other financial assets to become liquid.

Credit cards also provide peace of mind through their ability to cover urgent expenses promptly, whether for vehicle repairs or medical bills. They offer instant cash availability, unlike traditional plans and other financial assets that may require time to access. Further, the flexibility in repayment options and potential benefits like cashback contribute to managing financial crises effectively, providing a reliable financial cushion when needed most.

Personal Loan – The Last Resort

With the major requirements being handled by his emergency fund and credit cards, Sachin opted for a personal loan to pay the high annual fees at the international school he had selected for his children. This option enabled him to secure a decent amount of money, given his pristine credit score and his comparatively young age.

The Know Your Customer process was completed seamlessly, and the loan disbursal occurred within 24 hours, ensuring that his children did not suffer as a consequence of his emergency. While the loan EMI did add to his financial burden, the interest being charged seemed like a small price to pay, given the comfort offered by the loan during the time of need.

Considering his global experience, Sachin managed to secure another well-paying position within three months of his move to India. But had he not had the support of his emergency fund, credit cards, and personal loan, the days that he spent without a job would have seemed more burdensome. While emergencies tend to turn up unannounced, being prepared with these tools can go a long way toward easing the challenges.

Padmaja Choudhury is a freelance financial content writer. With around six years of total experience, mutual funds, and personal finance are her focus areas.