Lockdown and importance of Emergency Fund

During current lockdown all of are facing an unprecedented situation. We probably had never been locked into our housed for such a long period. On one hand this seem to be a much-deserved compulsory holiday, however on the other hand, many of us are facing stringent cash flow crunch.

Especially those who are into businesses and those who have their cash flow dependent on the day to day activities. Also, in some instances if the salaries are cut down or are not paid, will also find it difficult to manage their day to day expenses.

Few families are cutting down on their regular investments by skipping the SIP installments. Unfortunately, there is no better time than this to invest in Equity Mutual Funds or Shares. Thanks to Govt that they have directed the banks to offer moratorium for loan EMIs, that in case of cash crunch, one can skip the loan installments. Some families even have to cut down on the mandatory, day to day expenses like grocery etc. This situation is definitely not welcome.

There are a few blessed families, which will not be affected by problem of cash flow during this lockout. Yes, the ones who have maintained something called as Contingency Fund or Emergency Fund.

What is Contingency Fund or Emergency Fund?

It is sum of money (amount) maintained separately which can used in the situations like loss of job, ad-hoc function, hospitalization, temporary cash flow issues in business. This time a new, so far not known, thing has come up – the lock down.

How much should be the contingency fund?

We usually suggest our clients to maintain contingency fund equivalent to min. 3 months of household expenses and max. 6 months of household expenses. Similarly, businesses can maintain an equivalent amount for the similar period.

Where should this amount be invested?

As you never know when amount would be required, you can not take much risk with amount by investing in equity mutual funds or in shares. One has to invest this amount in saving / investment avenues. The avenues can be Fixed Deposit or Liquid Funds or any other safe and liquid investment option.

Liquid Funds: A Superior Alternate to Saving Account

We at Bonvista chart requirement of 5 Financial Foundation pillars for our clients. With these 5 pillars the Financial Foundation becomes strong and paves the way out for Financial Goals.

Are you following these basics that will take you to financial freedom?

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