With inflation touching all-time highs and unforeseen costs, such as those arising due to health problems, your clients will certainly know the importance of having an emergency fund which helps them manage these expenses better without affecting their savings. It acts like a safeguard against various risks to income. In order to make sure that your clients’ emergency corpus lasts longer and offers financial safety at all times, advisors must know how to make the most of this reserve:
When it comes to determining how the cash in an emergency fund must be invested, security and liquidity should be considered first. Hence, it is better to opt for products which are simple and easy to liquidate. Generally, savings bank account is a useful option to keep a part of the emergency corpus owing to safety and quick withdrawal facility.
In addition, financial experts must suggest their clients to park some of their funds in short-term fixed deposits which are joined to their savings accounts. This way, they can instantly access them in the event of an emergency.
Considering that the emergency corpus is not made for gaining returns, the idea should be to set aside a minimum amount i.e. at least 6 months of expenditure. However, financial advisors should recommend clients to keep aside extra money if they are saving more so that they can handle better a big expense or loss of earnings. Having sufficient funds will keep your clients away from debt.
Lastly, experts suggest that reviewing the sufficiency of the emergency fund should also be a part of the client’s financial plan assessment carried out annually by advisors. Rather, whenever a large portion of the fund has been utilized by the client, you should immediately check the amount to be replenished. Clients must be disciplined about reloading the fund on priority basis.