Planning for emergencies
While building an emergency kitty is important, don’t get bogged down if you don’t have one. From credit cards and personal loan to loan against securities, here are the various options for you
MUMBAI:WHILE emergencies always spell bad news, the situation could worsen if you don’t have finances in place. What should you do in such a situation? Here are the five options that can come in handy:
EMERGENCY FUND
The reason every financial planner asks you to build an emergency kitty is to take care of the unforeseen. This is one kitty you need to have even before you start investing. The amount should be enough to take care of at least six to twelve months of your expenses. You can save this money either in the form of fixed deposit or short-term liquid mutual fund.
CREDIT CARD
You can use your credit cards to pay off your expenses. Credit card comes with a grace period of up to 50 days. “It is a much faster way to get money during an emergency than going to an institution for a loan. You can also withdraw money against your credit card by paying a withdrawal charge at that moment, which varies from bank to bank. Such withdrawal, however, is treated as loan and the rate of interest is steep,” said Lovaii Navlakhi, founder and chief executive officer, International Money Matters Pvt Ltd. Remember, the interest rate is one of the highest in case you default. It usually ranges between 24%-48% an annum. Use this option only if you are sure that you will repay the loan within the grace period. It basically gives you some more time to pay back. Credit card also allows you to withdraw cash. However, the interest rate kicks in immediately. So keep it as your last option.
INVESTMENTS
It is not a good idea to dip into your investments parked aside for your longterm needs. However, in case you feel that you will be able to replenish the amount back into the kitty, you can look at take a small portion out for an emergency.
However, this can’t become a norm. Else, it will impact your overall asset allocation and you may not be able to meet your long-term goals.
LOAN AGAINST SECURITIES
You can also take a loan on your financial assets such as insurance, mutual funds, small savings schemes and fixed deposit, in case you need money. Usually, financial institutions provide loans only up to a certain loan-to-value ratio. However, the interest rates are lower than unsecured loans. Also, you won’t have to disturb your investment.
PERSONAL LOANS
The next option is personal loans. “A salaried person can opt for bank overdraft facility, which is the best form of an emergency personal loan, as it is not easy to get a personal loan from a bank for an emergency. [An overdraft facility is basically a situation wherein the bank allows you to withdraw more than what is already deposited in your bank account],” said Prasad Shetty, co-founder and CEO at S9 Financial Planners. Loans are expensive and it is not advisable to borrow for things you don’t need. However, say there is a medical emergency, which can’t be met with your insurance cover and emergency fund, go for a loan. Unsecured loans such as personal loans are expensive and range between 12% and 28% an annum. You should go for it only if you have no other option.
WHAT SHOULD YOU DO?
Nobody knows when an emergency will come up.
However, it is always good to be prepared. In case of crisis, make sure you pick instruments that have lower interest rate and faster access.
Just be careful about the fee and charges attached to it. Also don’t default on your repayment.