Last Updated on May 11, 2024 at 7:20 pm
If you are an avid non-fiction reader, you may have come across the phrase ‘keystone’ habit. Keystone habits are powerful and transformative habits that have the potential to trigger positive changes in other areas of our lives. Popularized by the book “The Power of Habit” by Charles Duhigg, keystone habits are defined as small, positive changes or habits that have a ripple effect in all areas of our lives.
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According to Duhigg, keystone habits can be any habit that sets off a chain reaction of other positive habits. For example, regular exercise is often cited as a keystone habit because it not only improves physical health but also leads to improved mental health, better sleep patterns, and a stronger sense of self-discipline. If you are waking up at 5 AM to go for a run, you will automatically want to sleep by 11. Which means you would want to eat on time and not drink any alcohol or caffeine.
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The idea behind keystone habits is that by focusing on one small habit that has the potential to create positive change, we can gradually transform other areas of our lives.
I was wondering what are some financial keystone habits that have a ripple effect and can trigger positive changes in other areas of our lives.
I have concluded that ‘emergency fund planning’ is the keystone of good personal financial management.
Emergency Funds = Income Stability
If you’ve an emergency fund – you have income stability in the short or midterm. If you did not have recurring or stable income, it would not be possible to create an emergency fund. This is a big green flag. This also means that you have already developed an awareness that things do go downhill some time and that it’s best to not have to depend on others.
Emergency Funds = Discipline
You will only be able to save 6-12 months of expenses, if you save with discipline. If your savings become mobile phones or shoes in the third month, then you know you won’t be able to go too far with your level of financial discipline. Anyone who has been able to independently create and maintain emergency funds knows delayed gratification’s power.
Emergency Funds = Growth Mindset
An emergency fund teaches you that not everything has to generate high returns for it to be financially significant.
If you can bear 12 months of money just lying in a fixed deposit account getting 7% & paying 10% TDS then you are already learning patience and controlled greed. That means you are not someone who is going to flip out easily and make rushed financial decisions for the sake of tax saving or 2% more.
Emergency Funds = Self – Aware
If you are doing it correctly, you have some awareness of what an emergency in your life looks like. A layoff looks different for the bread earner versus someone in a double income household. An emergency is not that you overspent on a lehenga for your friend’s wedding. An emergency is when you face loss of income or something that disrupts life as is.
Anyone who has built an emergency fund knows that you are only dipping into your savings for genuine emergencies not unplanned indulgences.
Emergency Fund = Financial Literacy
Success at managing to consolidate a fund means you also understand all the ABCs of finance. You can compare instruments (fixed deposit versus savings versus credit card with large credit limit versus liquid fund). You understand taxation on those instruments. You also understand how inflation will eat into it and what you must do to replenish the same. You get that getting a loan means a fund that has EMIs built into it in case of an emergency. You start thinking of much more than putting 20% of your salary away till you build up to 6 months of expenses!
Emergency Fund = Income and Income = Valuable Skills
If you’ve an emergency fund, however small – you have the skills to earn money. That means you can build on those skills and grow professionally.
If you are living hand to mouth, you are often neglecting professional growth as much as working towards financial autonomy.
Emergency Fund = Money Serves You
Having a fund makes you realize the point of planning personal finance is solely for liquidity when you need it.
Whether it’s a debt fund that allows you to pay for a wedding venue or a PPF that lets you re-furnish your home or an emergency fund that pays your EMI fees while you look for a new job.
It teaches you that there is a limit because no emergency fund is infinite and it also teaches you that the purpose of money is to provide you value when in the quantity you need, when you need it most desperately.
To sum it up, an emergency fund means you’re no longer intimidated by what the future brings, shows you’re self-aware, disciplined, patient and demonstrates your understanding of financial instruments, takes away planning for tax mindset and shows that you don’t blindly believe frameworks you’re fed.
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