Hello Readers!
COVID-19 Pandemic that started from China in November 2019 and reached throughout the world until March 2020. Today this pandemic has worsened the situation all over the world. People in crores have been infected and death due to this pandemic has been witnessed in lakhs all over the world. It has hit our mental health and physical health very hardly. COVID-19 pandemic has imparted its hard impact on the financial health of people also.
People all over the world have been hit financially hard, however those who had built their emergency funds in their good days, they easily have passed this tragic situation of complete lockdown, action taken by the government to stop the spread of COVID-19.
Having an emergency fund acts as a cushion to your expenses and finances in hardships like pandemic situation. They act like life-saving drugs for your finances, whenever life throws a surprise at you. If you also have used your emergency fund during this current pandemic situation, then there is a need to rebuild your emergency fund. This is because problems in life are not going to end with this pandemic.
In the future, there might happen another crisis or a job loss, medical emergency, or something that impacts your finances, so to make yourself prepared to cater to these situations there is a need to rebuild your emergency fund.
Here are the steps that may help you recreate your emergency fund.
Make A Goal
Calculate your target, for this first look have you taken out all your emergency fund or you have taken out a part of your emergency. If you have an amount left in your emergency, then at the time of calculation do include this in the target.
Your emergency fund should be equal to about four to six months of essential household expenses, including essential and basic household expenses, like rent, food & groceries, utility bills, school feels as well as home loan EMIs and insurance premiums.
After you calculate your goal, work out for a time frame to invest in recreating your emergency build, most likely it will be around 1-2 years.
Start Budgeting, Saving and investing in Emergency Fund
Calculate your expenses, for housing utilities, food, transportation, and do calculate your savings.
Take out the records of your credit card and bank statements to enlist all the expenses. Then, convert absolute expenses into budget percentages and compare it with the recommended budget percentages. It will indicate which expenses are off-the-limits, while also letting you know how much you save currently.
Bridge The Gaps
If you have calculated a target of Rs 6 lakh as your emergency fund and you are saving Rs 30,000 every month for it, it will take you around 20 months to reach your emergency fund target. Try shortening this period, you can do this by saving Rs 20,000 more for your emergency fund. This extra amount can be saved by either curbing some of your unnecessary expenses or you can also do it by increasing your income source.
Adjust Other Short-term Goals
If you are saving in short-term funds for your other needs or goals like buying any electronic gadget or buying a car, then its better put these investments on hold for a while. It is much more important to build your emergency first. Once you recreate your emergency funds or near to recreate it, resume your other short-term investments.
Remember do not alter your long-term investments for retirement or child’s higher education for your emergency funds recreation. Continue your SIP in long-term investments as far as possible. If you are unable to do it, then ‘pause’ it till you achieve the target for the emergency fund, but don’t stop it.
Automate Your Savings In Your Emergency Fund
Automating your savings in your emergency fund will ensure that your investment in your emergency fund is continued without any lapse or delay. This ensures that you saved for your emergency funds before you plan your spending for the month.
Automate the investing process through a direct debit from your bank account so that you don’t skip any contributions.
Park Safely
Emergency funds are the best safe in an investment instrument that offers security, accessibility, and liquidity. On this count, short-term debt funds and liquid funds, are much better for investing for your emergency fund, instead of the traditional fixed returns saving instruments like FD’s or savings bank accounts. By investing in the former, not only is your capital nearly safe and highly liquid, but you also earn better post-tax returns.
Do remember, this pandemic is not the end of crises on the earth, the end of the pandemic won’t mean the end of financial emergencies, they might occur in the future and you need to be prepared. So, at this time replenishing your emergency fund must be your priority.
For any kind of query, you can contact us at Shri Ashutosh Securities Pvt Ltd., we are here to help you in any way possible.
Happy Investing!
(Mutual Fund investments are subject to market risk Illustrations are for example only, there is no guarantee of returns. Past performance is not an indicator/guarantee to future returns).