Why emergency fund is a must for self-employed and freelancers

economictimes.indiatimes.com:

Saksham’s problem is not inadequacy of funds, but availability, when needed. The solution is to create an emergency fund and set in place a long-term saving and investment plan. The creation of an emergency fund has to be done on priority, given his irregular cash flow and large EMI obligation.

Saksham needs the comfort of knowing that money will be available when he needs it. Ideally, he should have set aside some money whenever he had excess cash and created this fund. In his current situation, if the business income does not flow in as expected, he may have to take a short-term personal loan to meet his monthly EMI obligation.

Saksham should invest in an ultra short-term debt fund to create the emergency fund.

He will be able to withdraw from it if there is a shortfall in his income. Additional loans will only add to his obligations and he should avoid such a situation. His emergency fund will be earning a return, making it a worthwhile move.

Creating this fund will require Saksham to put aside small amounts from time to time so that the emergency fund is enough to meet at least three months of household expenses and EMIs. The return from this fund will be low, but it will be liquid and available when he needs it. Short-term debt funds also do not face erosion in investment value, which means he can draw on it any time without worrying about the invested capital reducing in value.