New Delhi: With the rising cost of education, students take an education loan to pursue their higher studies. They start repaying the loan with the start of their professional lives. It becomes a little difficult for the students to manage their monthly discretionary expenses and EMIs (equated monthly installment) of the loan.
This can be managed by creating an emergency fund. In this one can park a set amount of money. At the start of the professional career, it is a bit difficult to manage the finances but as you excel in your career, your income tends to rise. From that time onwards, one can put aside fixed amount of money for emergency purposes.
According to the financial experts, an emergency fund or the contingency fund must have the amount equal to the nine months to one-year household expenses. It comes in handy during unforeseen events such as loss of job, illness, etc. In case you lose your job, monthly expenses and managing EMI becomes really difficult. This financial stress can impact your mental and physical health. In order to be ready for situations, it is important to have an emergency fund so that you have a decent amount of money to meet your expenses.
In a temporary slowdown, where people fear of a job loss or pay cut, the need for an emergency becomes relevant. In case of a sudden dearth of the funds, one can use his or her emergency fund. Some people opt for personal loans in case of insufficient funds, but personal loans are a costly affair.
Given below are some tips to save for the emergency fund while paying education loan-
Financial experts believe that emergency fund must be reviewed periodically to account for inflation, changing lifestyle and rising income. It should be enough to meet your nine months to one-year monetary requirements. Try to save keeping your liabilities and essential household expenses in mind. An initial year may be a little tough since your income and savings would be less. But eventually, once you achieve stability in your career, your ability to save money will increase. With your rising income, make sure to increase your contribution to this fund.
It may be noted that once you complete your education, banks or lenders offer relaxation of around one-year time so that one can start repaying the education loan. This relaxation period is known as the moratorium period. The repayment tenure after the moratorium period is usually five to seven years. It becomes important to create an emergency fund from the day of your first job. Keeping the moratorium period in mind, you can save money during this time. And once this period ends, you can start with your EMI payments for the education loan. One should not stop or skip any of the education loan EMI payment during the tenure. During the initial working years, it is a little difficult to manage both EMI payments and emergency fund, therefore saving during moratorium period can help you reduce the financial stress.
Another approach that can be adopted is that the amount of money you save through tax can be put in an emergency fund. The interest paid on the education loan allows tax-saving deduction under Section 80E of the Income Tax Act, 1961, for the initial eight years. So, in a way, tax saved can be utilised for creating an emergency fund.
Creating an emergency fund is not enough, one should review and rebalance it regularly. With time, factoring in inflation, the monthly expenses rise. In case you lose your job, make sure that the fund has enough money so that you don’t have to borrow money.
Maintaining an emergency fund is a good practice. So, once you repay your education loan, do not stop maintaining it. Make sure that this fund is enough to meet your daily expenses including rent, utility bills, and other essential expenses. If you have saved enough to fulfill your requirements for nine months to one year, you can prepay your education loan.