Budgeting for life changes

Emergencies and Managing Cash Flow

By Gautam Bhatia

Cash-flow crunches are a common feature in the life of Gen-Z, especially living in a country with bustling city life and rapid urbanization.

Sometimes the cash-flow problem is the result of careless overspending, inadequate financial management, or a lack of planning. At other times it really is not your fault. Unexpected emergencies, the loss of your job, and certain physical and mental health problems leading to a loss of productivity and, therefore, Income, can lead to cash-flow emergencies. 

It is important to remember, that planning for when you don’t have a plan is an important aspect of keeping your house in order and being financially mindful.

Also, you make just discover that the grass is always greener on the other side!

Consider the following point to manage cash flows during unexpected and sometimes expected emergencies:

Understand Financial Tremors

Financial Tremors are off two types: Spending Tremors and Income Tremors.

Spending Tremors include costs that share two defining features: They are unplanned for, and they are unwanted. These shocks include anything from a broken car bumper to a last-minute decision to attend a family wedding to a cavity in your teeth that is necessary to remove.

According to a study by the Pew Charitable Trusts, the median expense for a shock for a month of household expenses, across income groups, is about $2000 or AED 7346. This figure is as shocking to me as it may be to you!

A well-planned emergency fund is the first step to mitigate these potential predicaments and turn them into manageable setbacks. Building a financial cushion and having a plan to deal with unfortunate events must be planned before the potential emergency strikes.

Consider the following ways to do so:

1. Create an Emergency Fund – An emergency fund is money you set aside from your Net Income in addition to your savings. It is recommended that you set aside 3-6 months of your monthly expenses, as an emergency fund.

2. Insurance is your Friend – This is what insurance was designed for, to protect us from emergencies. However, many of us forestall purchasing essential insurances like Life Insurance and Home Insurance, since they aren’t mandatory.

3. Consider a Fixed Deposit – Fixed deposits continue to be one of the safest and reliable methods of securing money due to its low risk, low volatility nature, and low rate of interest. Most banks now offer you the choice to specify your tenor of deposit, which means you could tailor your fixed deposits to foreseen emergencies, like a cyclical dip in the economy.

Income Tremors, on the other hand, is an expected job-loss or sudden reduction in your income due to unforeseen reasons (Covid-19) or foreseen reasons (Dip in the Oil economy).

Income tremors are less likely to occur than financial tremors, however, they tend to have more adverse financial consequences.

Considering the Micro and Macroeconomic factors can give you a good estimate of when it is best to be on your toes and maybe put a little extra income for the month in your emergency fund. 

Macroeconomic considerations include national job growth, recessions, changes in tastes and preferences of consumers, broad-scale changes in technologies, etc. For Example, if the economic climate is doing well and jobs are flourishing, it is easier to venture out and look for jobs without worrying about the risk of losing your existing job.  The median duration over the last 30 years has dipped to as low as one month in good times and spiked to as much as six months in the aftermath of the global financial crisis. Look at the ebbs and flows of the market in general and prepare yourself with the opportunity to have a greater cash flow at a time when the economy is low.

Microeconomic considerations are taken with your individual relationship to your company, consider the changing corporate values, your level of skills with respect to your income, and how your company is faring. For Example, in the aftermath of a raise, it is quite common for employees to lose their job altogether in a span of six months. This happens as employees fail to justify their raise and as a result lose out on the job.

Both Income Tremors and Spending Tremors will happen in the course of your life. To get to the brighter side less jaded than an average person, it is important to self-Insure yourself from these tremors appropriately by having reserves and maintaining liquidity.

Till Next time,

Remember that even a great storm is like a sunny day for anyone who plans for a failure of plans.

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