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  • Writer's pictureSahastha

Emergency Fund and a lesson from Covid-19

Updated: Oct 4, 2023

Having an emergency fund is an ideal way to tackle emergencies. It is not for meeting your routine expenses. So, you must accumulate it over a period of time specifically to meet your unanticipated financial shortfalls that may occur in the future.

So think of an emergency fund as an insurance to protect your assets such as home, investments and other assets. This way you don’t have to cover your financial emergencies by dipping in to other investments like home, retirement corpus, etc.

Predict the emergencies and prepare accordingly

Even if you have excellent savings and conservative spending habits, unforeseen circumstances might happen like job loss, home appliance repairs, car repairs, medical expenses, etc. An emergency fund is used to pay for this crisis so it does not put any undue stress on you that can lead to debt.

Calculate how much you need to park as an emergency fund

As per financial standards, the emergency fund should contain between three to six months of your living expenses. The ideal amount in an emergency fund will differ from person to person according to their nature of job, health, number of dependents in your family, and financial situations.

How to manage it in a disciplined manner

You can keep your emergency savings in a place where you can access them quickly without any extra charges when the time comes. Ideally, emergency fund should remain highly liquid by keeping it in savings account, liquid funds, and/or overnight funds with an immediate redemption facility.

Your emergency fund should be in liquid form, in safe mode, and keep it separate from other financial goals. Use it only when required, not for discretionary expenses.

Always remember, it is not the job of an emergency fund to generate high returns. It is to be used in an emergency.

Covid crisis effect on people’s financial stability

The impact of covid-19 has challenged everyone. People are getting panicked and have started thinking about how heavily they are managing their expenses in this global pandemic situation with loss of income.

Who knows what’s going to happen in this world that is changing every moment, the basic and foremost step in financial planning is to create an emergency fund to protect your assets from uncertainties and keep your goals on track.

Real story of an emergency fund saving the day

Srinivasan, who is an event manager in a reputed company shared his experience about having an emergency fund. He has monthly income of ₹70,000, in that his monthly spending’s are ₹40000, a car emi  of ₹10000 and he is using remaining monthly surplus for his child’s graduation. In the month of march, he lost his job due covid crisis. He doesn’t have any source of income to survive in this period. If he doesn’t have an emergency fund, he will need to liquidate his other assets like gold, properties, personal belongings to manage his living expenses. If he doesn’t pay his car emi regularly, he will go under lot of pressure with extra penalties, he might lose his car as well. Not having an emergency fund directly effects his current assets and also endangers future accumulation of wealth.

Be sensible, stay safe, and build an emergency fund to avoid short-term financial hurdles.

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