The layoffs and salary cuts caused by the COVID-19 pandemic have proved the importance of having an emergency fund. This emergency fund can be beneficial in providing a safety net in such circumstances. People with an emergency fund are better equipped for such events as they can maintain their daily expenditures for a few weeks or months if they lose their jobs. Those who do not have an emergency fund have to rely on credit cards or loans that come with additional interest that has to be paid.
How much emergency fund is required?
The figure can differ for each individual due to variations in needs and the nature of expenses. But before you calculate the emergency fund you need, it is essential to calculate the minimum amount of funds required for unavoidable monthly expenditures including loan instalments, rent, food and utility bills. Once the monthly expenditure is determined, the emergency fund should be created to support up to 3 to 6 months without any income.
Where should the emergency fund be kept?
Once the amount of the emergency fund is finalized, you need to start working towards building it. A safe place to keep the funds is a savings account as they offer high liquidity which is of high importance during a crisis like the COVID-19 pandemic.
A better option than a savings account would be to store the funds in a liquid mutual fund which will offer much higher returns than the savings account. However, to keep risks minimal, the complete amount should not be stored in the mutual fund as it can create a liquidity crisis.
The emergency fund will require a significant amount of effort to establish. This can be accomplished by investing in equity mutual funds, which can then be switched to debt mutual funds once the emergency fund amount is achieved.
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