Importance of having an Emergency Fund
Jun 16,2020 Investing, Savings, Peer to Peer Lending
The coronavirus (Covid-19) crisis has created chaos throughout the world. The new virus is not only deadly, if not taken adequate protections and social distancing can spread quickly to masses leading to huge healthcare problems and deaths. This has already overburden entire healthcare systems and crippled financial stabilities of many. Another side effect of the pandemic is the toll it's taking on everyone's livelihood (financial challenges). Most of the Global countries had declared total or partial lock-down, impacting the economy of the state as well as financial position of the individuals and businesses.
The impact of COVID-19 has shocked everyone; financially as well as mentally, and it's definitely a very tough and challenging times for families and businesses to manage their financials. The pandemic was unheard; its resultant impact is not only unexpected but unbelievable. Millions and Millions of the people have lost their jobs, they are still struggling to get their jobs. MSMEs are grappling with problems like low liquidity or cash flow and lack of workforce as the daily wagers have gone to their villages. Businesses that are into manufacturing has also taken a big hit on their manufacturing, sales and exports. The services sector has been equally impacted and slowed down with more people opting for social isolation. A sense of fear and uncertainties has impacted each member of the society and community.
The impact of COVID-19 on Indian economy can be witnessed by the GDP growth rate being slashed by all the leading economists and research house; its being expected that FY 2020-2021 GDP will have a negative growth. An unimaginable situation. The IMF has warned that, the worst recession since the Great Depression will dwarf the economic damage caused by the global financial crisis a decade back.
What is an Emergency Fund?
An emergency fund is a pool of liquid money set aside for unforeseen expenses like a medical expense or a house repair. Having an emergency fund can be the difference between a small bump in your financial life and complete disaster in your entire life.
In these hard times an emergency cash fund is your first line of defense against debt and any further financial hardship. Financial experts recommend keeping between three months to six months worth of living expenses in cash or cash equivalents to cover unexpected bills or crisis.
The importance of having an emergency fund can be realized in hard times like these when there is nation-wide lock-down, closure of businesses, loss of job for some and medical expenses for those suffering from the pandemic. Though the Government of India has taken various measures like loan moratorium, emergency rate cut and ease of asset quality norms, financial support; the need for an emergency fund is inevitable considering global economic slowdown.
What is an Emergency?
You should only dip into your emergency fund for a real emergency; to keep yourself afloat between jobs, for a car repair, a medical expense, or a home repair or yours kids education, etc. You cannot use your emergency fund for things like a vacation, a shopping spree or to upgrade your perfectly good cell phone or laptop.
The importance of an emergency fund in a pandemic like COVID-19 can be elaborated as followed:
- Replace income in case of temporary loss of job
- Cover things you don't budget for, like medical emergency
- Amidst the recent lock-down, it can help small businesses to survive and continue supply chain for a short tenor
- It helps to maintain lifestyle expenses in case of lower income during lock-down
- Helps you to stay out of debt
- Take advantage of financial opportunities
- Sense of security to individuals having high expenditure
- When invested in money market instruments, it helps in experiencing higher yields in case of increase in interest rates
- In case an individual has saved a higher amount as emergency fund, he can contribute the same for the welfare of lesser benefited group in the society. The individual can donate a good amount for the welfare of the lesser benefited people.
- It gives peace of mind when faced with a reduced income
Where Should You Keep It?
This is a controversial subject. This money needs to be kept where it can be quickly accessed and where it will be safe. The money need to be kept in a safe investments, where in you can withdraw the money, as and when such emergency arises, without any fear of loss of value due to market volatility or liquidity issues.
Not only individuals, but the Government of India has also released an emergency fund to provide financial and infrastructure aid to states with the ongoing spread of the pandemic. These funds are used by the Center is setting up shelter homes for migrants who were caught between state borders. The Center is also providing food and shelter to homeless people including migrant labourers who are stranded on account of lock-down measures. These funds are also released to the State Governments to provide relentless support in mitigating the pandemic.
There are many differing predictions about how the future will play out with regard to the economy and the availability of treatment for coronavirus . Whether life returns to normal sooner than expected or the crisis grows more serious, one fact is certain; when you have extra cash in savings - even a small amount - you're in a better position to whatever situation comes your way.
And remember - if you can, you might consider starting an emergency fund with small contributions because they add up and could make a huge difference for situations like this, giving you a week of groceries, money to pay your bills, or funds to cover your housing. Though pandemic like COVID-19 are rare, it teaches an important lesson of having an emergency fund in place, which should not be ignored.
Wish you a very healthy and safe life and financial stability and prosperity.
The author is Finance Controller of www.omlp2p.com. The article written by him is in his personal capacity and educational in nature. All the views are his personal views. www.omlp2p.com, the peer to peer lending platform has placed (promoted) the articles to benefit the general borrowers and lenders.
www.omlp2p.com is one of the India's RBI (Reserve Bank of India) registered NBFC-P2P, providing technology enabled e-commerce platform to it's Lenders and Borrowers to avail their loan at a highly competitive Rate of Interest, in a hassle free manner without much of documents; at the same time it provides its Lenders Higher return on their capital by providing opportunities to lend to good quality, well assessed borrowers.