Worried About Mass Layoffs in 2023? Here is How an Emergency Fund Can Come to Your Rescue

Mass layoffs have become a common occurrence in 2023. A slowdown in consumer demand due to high inflation levels in the aftermath of the COVID-19 pandemic has resulted in recession fears in various major global economies. Consequently, major global corporations, particularly tech companies, such as Meta (Facebook), Amazon, Microsoft, Alphabet (Google), Twitter, and LinkedIn, announced mass layoffs in the last few months as a part of cost optimisation measures.

Many Indian startups such as Byju's, Unacademy, Swiggy, Ola, Dunzo, OYO, and Meesho, to name a few, have also announced layoffs as they struggle to raise funds amid a tough global environment. Numerous firms are also opting for a freeze in fresh hiring.

[Read: What Should Be Your Mutual Fund Asset Allocation Strategy Amid Rising Global Uncertainty]

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When the money tap is on, particularly with regular flow of income, one never feels the heat. However, life, as you know, throws unpleasant surprises when you least expect it. Various macro and micro economic issues can make one's employment vulnerable, thereby causing various hardships.

Besides job loss, various other unforeseen circumstances, such as medical emergencies, demise/disability of an earning member, natural calamities, unexpected rise in expenses, etc., can also affect your family income and take a toll on personal finances.

[Read: 5 Steps to Protect Yourself Financially from any Potential Downside in 2023]

This highlights the need for everyone to build a contingency fund (also known as an emergency fund or a rainy day fund). We cannot prevent or predict the arrival of unpleasant times, but we can surely reduce its impact with the help of a contingency fund.

Ideally, every individual should have an adequate corpus reserved in the form of an emergency/contingency fund before one begins their investment journey.

Here is how setting aside an emergency fund helps:

1. Offers peace of mind

Having a backup plan such as a contingency fund provides a financial safety net that can be comforting when adversities catch us unaware, thus saving us from worries. Having an emergency fund can give us, and those dependent on us, the confidence to handle testing times financially and provides courage to confront and resolve the situation.

2. Helps manage debt

If individuals hold an adequate amount as an emergency fund, they can avoid borrowing from friends/relatives or financial institutions during times of adversities which can save them from debt trap. It also helps individuals to take care of basic necessities, EMIs, or medical expenses without having to depend on anyone.

3. Helps curb frivolous spending

When the emergency corpus is parked separately in an earmarked safe and liquid avenue and not utilised on certain avoidable lifestyle expenses, it indirectly controls instant gratification. This inculcates good financial discipline, which may otherwise result in spending too much on things one may not need.

The ideal amount to be parked in the form of a contingency fund may range from 6-12 months' worth of expenses or even more, depending on one's financial circumstances. While preparing the contingency fund, one may take into account their monthly expenses, life and health insurance premiums, EMI (if any), and other expenses that must be absolutely met, no matter what the situation is.

Since contingency fund should be readily available for use whenever a need arises, safe and liquid avenues are suitable for parking this corpus. The purpose of an emergency fund is not to earn high returns but to have instant access to funds in case of emergency.

Here are some avenues that may be suitable for parking emergency corpus:

a) Bank savings account

Bank savings account and short-term fixed deposits are among the options still preferred by many people to park their surplus money. It may also be a suitable option to park emergency corpus. The bank savings account also offers other facilities such as a Recurring deposit, Sweep-in Account, or a Flexi deposit.

b) Liquid Funds

Liquid funds invest in money market instruments like Treasury bills, Certificate of Deposit, and Commercial Paper with maturity of up to 91 days only. These funds do not have any entry or exit load. Liquid Funds also offer an instant redemption facility under which investors can withdraw a maximum of Rs 50,000 or 90% of the invested amount, whichever is lower, within 30 minutes into the registered bank account. These funds may be suitable for those looking to park fund for a few days to a few months.

c) Short-term debt funds

Short debt funds may be suitable for parking money for a few months to a year. These funds hold securities with a higher maturity compared to Liquid Funds. Do note that these funds may levy an exit load if redeemed within a specific period.

It is important to note that if an emergency fund is inadequate, the contingency planning exercise may be ineffective, and the finances may get drained when a testing situation arises. Thus, it makes sense to build an optimum emergency/contingency fund to provide a safety net to individuals and their families.

Remember the wise words, "Hope for the best but be prepared for the worst".

Disclaimer: Investment in securities market are subject to market risks, read all the related documents carefully before investing.

Disclaimer: This article is for information purposes only and is not meant to influence your investment decisions. It should not be treated as a mutual fund recommendation or advice to make an investment decision.