Are You Using Your Emergency Funds Wisely to Tackle the Coronavirus Pandemic

Apr 11, 2020

Despite the lockdown measures and strategies to control the further outbreak of the COVID-19, day by day the number of cases is rising steeply in the country. As per the Ministry of Health and Family Welfare records, 6565 were the active cases reported as on April 11, 2020 .

Due to this nationwide lockdown, not only are the macro and microeconomic environments under strain, but also the lives of the common man because monthly incomes will be deferred and/or cut.

[Read: What Could Be the Potential Impact of a Lockdown on Your Mutual Fund Portfolio? Know Here...]

Some may even stand to lose their jobs, particularly the ones employed in the private sector. Those who are self-employed with small businesses, they have had to actually shut shop and twiddle their thumbs, after paying their staff.

[Read: 6 Symptoms Of Bad Financial Health]

A friend of mine, who runs a small business, for the month of March he couldn't make any sale, he didn't earn a penny. Thankfully he had some money in his savings account, he could pay his employees, and pay his credit card bill, along with other utility bills, office rent, etc. but has to stick to withdrawal limits.

Coronavirus lockdown situation is a reminder of life's unpredictability throwing a curveballs at us.

With no financial reserves, many may have been totally unprepared to deal with expenses like paying for overpriced groceries for survival, EMI and premium payments, etc. in the current situation. Lack of financial planning has found many high and dry,coupled with stress and anxiety.

Image source: Image by Pete Linforth from Pixabay

A pool reserve is a contingency fund or a rainy-day fund. Building a contingency fund, also known as an emergency fund or rainy-day fund, is very important to handle exigencies or uncalled events in life so that you meet all your expenses and survive during difficult times.

In times like these handling of your hard-earned money is of utmost importance, as improvement in the situation post lockdown would take time as well.

[Read: 5 Valuable Money Management Lessons from the Coronavirus Pandemic]

Ideally, you must maintain at least 6 to 24 months of living expenses, including EMIs as your contingency reserve.

You may add a little 5%-10% extra for medical emergencies, taking cognizance of the health insurance and medical record of you and your family members.

Now, though big is better, maintaining too much money as a contingency in a savings account or low interest-bearing investments may not be wise because the objective of countering inflation would be lost.

A contingency reserve even acts as a buffer or provides investment opportunities during market crashes. Besides, when you are almost nearing your goal, your motive is to protect your capital, that time you can transfer it to cash or near-cash investment avenue for instant liquidation.

Potent avenues that serve as the emergency fund:

Ideally, up to 50% of the emergency fund should remain highly-liquid by keeping it in a savings account or a mix of a savings account and liquid or overnight funds with an instant redemption facility. The remaining corpus can be invested over the other products.

Always remember, it is not the job of an emergency fund to earn a high return. The job of an emergency fund is to be there in an emergency.

Here are a few avenues to park your money that will provide you with easy access to cash:

But ensure you approach even short-term funds with your eyes wide open and pay attention to the portfolio characteristics and quality of the scheme. Prefer the safety of your principal over a higher risk-return. Stick to mutual funds where the fund manager doesn't chase returns by taking higher credit risk. Further, asses your risk appetite and investment time horizon while investing in debt funds.

While investing in short-term debt funds, consider keeping an investment horizon of at least 2-3 year.

So what to do if you don't have a contingency fund?

Your first step should be to start saving for at least 6 months of your regular expenses before investing for any financial goals and keep it in a savings bank account or if you want a better return than putting money into a savings bank account, then opt for a sweep in account, flexi deposit, or liquid funds aor overnight funds.

Once 6 months of your contingency funds are available, then your next aim should be to increase it to 12 or 24 months of regular expenses, which can be done in a phased manner over a period of time. If you have any EMIs, you must remember to include them in your regular expenses when building up your contingency fund.

[Read: Worried About EMI Payment amidst Lockdown? Take It Easy, Here's Some Good News!]

To build a contingency reserve follow these five steps:

  1. List down all your monthly expenses

  2. Calculate your contingency reserve requirement for six-twelve months

  3. Choose an appropriate mix of investment avenues to invest in sensibly and regularly

  4. Review your contingency fund

  5. Keep contingency reserve separate from your regular investment financial goals

Remember, it is essential to save before investing, even the Oracle of Omaha (Warren Buffett) has mentioned it, "Don't save what is left after spending; spend what is left after saving".

In conclusion, at the end of the day saving is an exercise of putting away money to invest towards financial goals and to be prepared, to survive troubled times like the coronavirus lockdown..

Be sensible, stay safe, and build a contingency fund.

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Warm Regards,
Aditi Murkute
Senior Writer


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