How To Build Your Emergency Funds To Tackle Covid-19 Like Situations

The rule of thumb is to create an emergency fund of at least six months of expenses but it is ideal to have at least two years of expenses to deal with situations like Covid-19, where fear of job losses has become pronounced.

Nadia: An elderly woman shows a 500 rupee note after withdrawing from her Jan-Dhan account, during the nationwide lockdown to curb the spread of coronavirus, in Nadia district of West Bengal, Thursday, April 16, 2020. (PTI Photo)

New Delhi, April 15: Did you imagine a health pandemic of the magnitude of Covid-19 striking us? None of us have would have thought that a virus can turn the global economy topsy turvy leaving people in disparity. Today we are living in uncertain times and nobody can predict how things will pan out in the coming months. From the richer economies shrinking to market volatility, the Covid-19 outbreak has not only left people jobless but made it difficult for the poor to survive. More than 6.65 million people filed for unemployment benefits in the US last month. Back home while extending the lockdown to 19 days, Prime Minister Narendra Modi has urged businesses not to fire employees. Even as you don't have much control over physical wellness, you can be a little prepared to deal with the impacts of the economic slowdown by managing your money well.  Basically managing finances include tracking your expenses (through budgeting) and savings that can help you sail through the economic downturn. India has responded well to the 21-day-nationwide lockdown which has now extended till May 3. But if you don't have an emergency fund yet, then it is time for you to create one. According to financial planners, it is prudent to assess your emergency funds and increase if required. Here are things to consider for the emergency kitty. What is emergency fund? Emergency funds are over and above your investments which you create to deal with uncertainties in life. It could be a job loss, quitting work, medical situations or anything else. Emergency funds are basically liquid investments or cash that be easily taken out whenever required. How much you should save in an emergency fund? The rule of thumb is to create an emergency fund of at least six months of expenses. However, if you are employed in a sector that poses a greater chance of job loss then it is ideal to have at least two years of expenses to deal with situations like Covid-19, where fear of job losses has become pronounced. How to create one? Firstly, never consider your bank account as your emergency fund. To start with a check on your savings including the fixed deposits or other savings account. You can probably look at redeeming a longer duration debt fund and moving it into a category with a period of less than a year. If you have reached a figure required for the emergency fund then start diverting your current savings into this fund. If there are no debt funds then planners suggest that you move the systematic investment plan (SIPs) towards building an emergency fund. The fund can be a mixture of very short-term debt funds, savings accounts including cash. Planners say in case of debt funds undergo credit downgrade or any default it does not impact the liquid category majorly. Risk-averse investors can put their money in bank deposits and there is ₹5 lakh deposit insurance per customer per bank. Gold mutual funds and gold ETFs have also emerged as an investment options in emergency funds. This is mostly from a safety perspective because yields from debt funds have declined because of volatility while gold can also be sold in urgent situations. Also, it is important for people residing in remote areas with limited numbers of ATM network to keep almost two month’s expense as cash. So, make the best of your investments during this time and take measures to stay away from Covid-19.