Smart Ways to Shield Your Financial Goals During Emergencies

April 26, 2025

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Life is full of surprises, and you may experience both pleasant and challenging at every bend. We may not predict the future, but we can certainly prepare for it.

By creating an Emergency fund, you can ensure financial stability, reduce stress, and maintain a long-term focus on your goal-linked investments. An emergency fund is a financial safety net that protects you from unforeseen expenses like a sudden medical emergency, Job loss, or job switching, or utilizing the fund to explore opportunities in the Share Market without disturbing your goal-linked long-term investments like Retirement Corpus, Child Education. An emergency fund will help you to meet unexpected financial challenges confidently while keeping your goal-linked investment strategy on track.

Emergency Fund vs. Goal-Linked Investments: Understanding the Difference

Let us explain the difference between an Emergency Fund and the Goal-linked investment :

An Emergency Fund is designed to meet immediate need towards unplanned expenses or opportunities, while a goal-linked investment is intended to grow over the long term to achieve specific financial goals like Retirement, Higher education.

Building Your Emergency Fund: A Step-by-Step Approach

1> Aim to save at least three to six months’ worth of your essential living expenses. If your income is irregular, consider having a larger fund. The basic guideline for an emergency fund is to set aside your 3, 6, or 9 months' take-home pay. This is called the “3-6-9 rule” for creating an emergency fund.

2> Create your emergency fundCreate your emergency fund by investing in a high yield savings account, a liquid mutual fund for easy liquidity with minimal risk of erosion of the Principal amount, and in Short Term Certificates of Deposit (CDs), which offer guaranteed returns.

Emergency Response Strategies: Protecting Your Financial Goals

1> Assess the emergency: Is the expense a genuine emergency? Is it for satisfying a want or to meet an emergency?

2> Avoid dipping into goal-linked investments: When you have an emergency fund, resist the urge to disturb your goal-linked investments to meet the emergency. Disturbing your goal-linked investments can lead to losses, may be affected by tax, and hinder you from reaching your financial goal.

3> Impact on the Emergency Fund: If your existing emergency fund is significantly impacted due to the serious nature of the Emergency, you need to temporarily adjust your contributions to your goal-linked investments to prioritize rebuilding your emergency fund.

4> Guidance from your Financial Advisor: Discuss the situation with your Financial Advisor. He/she may help you adjust your investment strategy without significant compromise to your goal-linked investment.

Now, what will happen if you have no emergency fund and have to dip into your goal-linked investments for meeting an emergency ?

Strategic Redemption: How to Recover After Emergency Fund Depletion

It is understandable that not everyone has a dedicated emergency fund to meet the Emergencies. In the absence of an emergency fund, you have to have careful consideration, strategic withdrawals and a strong commitment to replenishing the funds.

Redemption Strategies to be Followed After Using Your Emergency Fund:

1> Identify and Quantify the Emergency: Possess a clear understanding of the emergency and the precise amount necessary to address it.

2> Prioritize your Goal-Linked Investments that may need to be temporarily suspended: Retirement, Child Education or any other objectives.

(a) Liquidity: Assess how readily and swiftly you can access funds from each investment. Liquid Mutual Funds or short-term debt funds typically offer greater liquidity than others. Withdrawing from Equity based Mutual Funds can be risky during market downturns. You may pause your SIPs temporarily.

(b) Exit Loads: Evaluate the fees that may be incurred for premature withdrawals from certain investments including Mutual Funds and Fixed Deposits.

(c) Tax Implications: Prior to making any withdrawal decision, ensure you have a comprehensive understanding of the tax consequences associated with the withdrawal.

(d) Potential impact on your Goal: Deliberate on how withdrawals from your goal linked investments may adversely affect your long term goal.

(e) Make Replenishing Your Priority: Depending on the nature of the emergency and the time horizon for your goal linked investments, make replenishment a priority. Identify areas where you can curtail expenses and reallocate the savings towards replenishing your investment.

(f) Engage Your Financial Advisor: Seek the expertise of your Financial Advisor to develop a personalized plan for replenishing your goal linked investments.

In the end…

Protect Your Goals: Establish Your Financial Safety Net Now

The relationship between your emergency fund and goal-linked investments represents the perfect balance between short-term security and long-term prosperity. By implementing a thoughtful emergency fund strategy, you create a protective barrier around your financial goals, ensuring that life's inevitable surprises don't derail your investment journey while providing peace of mind that you're prepared for whatever challenges may arise.

Financial resilience requires more than just setting aside funds—it demands a comprehensive approach to money management that separates immediate needs from long-term aspirations. This strategic separation establishes a financial framework that can weather emergencies while continuing to build toward your most important life goals, effectively protecting your financial present while preserving your financial future.

-Suman Dan

-Dayco India

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Smart Ways to Shield Your Financial Goals During Emergencies

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