A colleague asked,
I want to set aside an emergency fund purely to handle any loss of employment situation that I might face. What would you recommend?
Here’s what I recommend:
- First, estimate your monthly expenses (including EMIs, monthly savings for annual expenses, and routine household expenses). Let’s say this amount is M.
- Structure a 6-month fixed deposit ladder (i.e. one fixed deposit each month for six months with each fixed deposit maturing in six months). Each fixed deposit should have it’s face value equal to M.
Now suppose you do lose your job. You only need to wait for that fixed deposit with the nearest maturity date to mature, close it, and use the proceeds for your monthly expenses. Of course, once you’re back in a job, you will need to put the ladder back in place. I also believe that the interest you earn will more or less account for any inflation, but when you don’t have a job, concerns about inflation should be the last thing on your mind. What should be on your mind, however, is frugality.
How does this strategy sound?