scorecardresearchShould self-employed choose a large emergency fund?

Should self-employed choose a large emergency fund?

Updated: 29 Jun 2022, 12:40 PM IST

Self-employed people must decide on their emergency fund differently from their salaried counterparts. This is because the regularity of income is a major deciding factor when choosing your emergency fund corpus.  

The self-employed must opt for a large emergency fund corpus.

The self-employed must opt for a large emergency fund corpus.

Not everyone might be interested in a nine-to-six job. Not everyone may have access to a fixed income at the end of every month. Not everyone enjoys the luxury of having his or her family members contribute to the family’s expenses. Self-employed people often worry about falling out on their potential clientele or income sources. 

During some months, they may have their heads buried under work; at other times, they may simply be sending out cold emails to prospective clients hoping for more work and new contracts along the way. With both income and its frequency being equally sporadic, self-employed people have to be a lot more careful while planning their emergency funds and deciding their savings plans accordingly.

To start with, being self-employed comes with a lot of inherent risks. No matter how poetic the idea of working for yourself on your terms and conditions seems poetic, the accompanying efforts can wrench dry the eagerness out of you. Isolation and frustration are common emotions that spring up owing to their inability to fall back upon a fixed monthly paycheque. Apart, they are bereft of the benefits of having fixed monthly deposits in provident fund schemes like the Employee Provident Fund Scheme (EPF) which allows 8.1 per cent interest on its deposits. The self-employed have very little to fall back on, which means that they must be financially prepared for all planned and unplanned events in their lives.

While none on this planet is infallible, having an adequately sized emergency fund in place can cushion against sudden backbreaking falls. However, this too means that the self-employed must plan a big emergency fund keeping in mind the irregular nature of their incomes and the burden of facing untoward circumstances with less money in hand. Handling finances with infrequent cash flows can be a task, if not planned well in advance.

Planning a big emergency corpus

How big should your emergency fund be is a question that begets many answers depending on your current financial status, your income levels, the extent of your responsibilities, and myriad other factors. Ideally, those with erratic income sources and levels must aim for a fund equivalent to two years’ earnings. However, difficult creating such a fund may sound, it is not impossible. 

A lot depends on the frequency of your cash flows. Do not forego the possibility of not being able to earn for a month or two in between, thus, indicating a possible disruption in fund flows. 

You can start by focusing on your earnings. Keeping your earnings level constant while also ensuring additional income sources is the first step that you must follow. Second, take care of your savings. Know how much cash you want to keep at home while parking a part of your funds in fixed deposits or recurring deposit schemes. Earning on your savings is equally important, which is why you must put some money in liquid funds that you can then redeem after a short period depending on the fund tenure.

Catering to different needs

Amassing a sizeable emergency corpus is important, but a lot depends on how much you must spend and the cursory expenses you can do away with. Do not ignore necessary expenditures including food, rent, education fees, medicinal expenses, travel, loan instalments and insurance premiums. 

The idea behind creating this emergency fund is to ensure enough cash reserves to pay off necessary expenses in the event of loss of income. With the money in hand, you will be financially adept to handle sudden and unforeseen events sans any hurdles. The money in your kitty will enable you to ride over unexpected and rough patches in your life. 

Choose your investments wisely

You must opt for investments that yield you in the short run without compromising on the quality of returns. Choose funds that can be immediately redeemed within a few hours or with just the click of a button. Refrain from putting money in equity funds that are best for those with a long-term investment perspective. 

If you are not sure of your short-term investments, you may choose a combination of two or more funds that would yield healthy post-tax returns, thus, allowing you immediate access to the much-needed money as and when needed. 

Your mode of investment again would depend on your comfort level, which is why you must choose between a lump sum payment and systematic instalment plans (SIPs) accordingly. You may also resort to systematic transfer plans (STPs) to transfer a fixed amount every month to equity funds. 

Investing in health insurance from a credible insurance company is a must as sudden hospitalization expenses and subsequent medical bills can make a dent in your savings. Treat your health insurance policy as an essential investment that you will definitely need at some point in life.

Do not ignore term insurance 

With so much unpredictability of income, it is difficult to say how your family would fare financially in your absence. Self-employed people often complain about how they find it difficult to arrange enough corpus for their loved ones. This is where term insurance comes in. When you decide on your emergency fund, make enough scope to be able to pay your premiums to ensure financial stability and security for your nominee(s) in the event of your sudden demise. Choose a term insurance policy that promises a minimum of 15-20 lakh cover. This will ensure enough fiscal guard in lieu of nominal premiums, thus, putting in place enough cover that comes at manageable costs.

What is emergency fund?
First Published: 29 Jun 2022, 12:40 PM IST