Why you should create an emergency fund before starting with investments?
March 20203 min read
The Covid – 19 outbreak has shaken the world to its core. But the impact of this pandemic goes beyond the capital markets. While the Equity and debt markets across the globe are seeing significant volatility; there is a socio-economic impact of Covid – 19 on the day to day lives of many people.
One of the prominent examples of this impact is the US unemployment claims data. As the world is trying to reduce the spread of Corona by working from home, there are some industries where it is not possible. And this has led to an increase in jobless claims in the US. If we look at the numbers, as on march 22nd 2020, the unemployment claims were 33,00,000 from 2,82,000 from a week before. This is the highest in the history of the US.
Here’s a chart which will clear the seriousness of the situation:
All of this highlights the most essential aspect of financial planning: Emergency Fund.
What is an Emergency Fund?
Emergency Fund is simply an amount that you need to set aside for any financial emergencies. When everything is hunky-dory, having an emergency fund may be your last priority. But when we are in a situation like today, we realize the importance of it.
When there is extreme uncertainty surrounding the income if you have an emergency fund to fall back on; it gives a level of comfort. In an unfortunate event of loss of a job or regular income, the income stops but expenses like EMIs, Insurance premiums, School Fees, House Rent continue.
By having a sufficient emergency fund, you can ensure that all of such expenses are taken care of while you get back on your feet.
Where to invest the Emergency Fund?
The ideal way to park the emergency fund is investing in very short term debt funds like liquid, ultra-short, low duration categories. But why not in the bank account? There are two reasons for this:
- Psychological Conditioning: Most of the time, the amount in a bank savings account is spent on unnecessary items when there is an additional surplus. If you have created a different basket for an emergency fund, you may refrain from taking money out because you know that it is meant for emergencies only.
- Additional Return: Debt funds can also provide an incremental return of about 2-4% over the savings account. The prevailing interest rate for a savings account is 3.5-4%; but short term debt funds can give a return of about 6-8% with similar liquidity.
Hence investing the emergency funds in debt funds is a win-win.
Here’s how Investica can help you in creating an Emergency Fund:
With the help of Optimo i.e. the Robo Advisor, you can create an emergency fund. Yes, that’s right. All you have to do is give an input of your expenses, and Optimo will tell you how much amount you need to put aside as an emergency fund with recommendations of funds.
With just one click you can invest to create an emergency fund. This emergency fund will last for 6 months and will take care of all your essential expenses. All of this while earning a better return than a savings account.
Before, doing any investments, make sure to create an Emergency Fund. While you are at it, you can use Optimo and take a systematic approach to create a financial plan and invest according to this plan.
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