The future is uncertain and all of us know it. But still, we ignore the fact and do not prepare ourselves for future contingencies that may adversely affect us. Job loss, illness, accidents, etc can hinder your monthly cash inflows which in turn can bring hardship for your family. Ever thought, that in the absence of any income, how would you be able to pay for your children’s tuition fees, home loan EMIs, run your household chores, and many more? Hence, it is imperative to have an emergency corpus in place.
Financial advisors suggest that building an emergency corpus is the first step towards financial freedom and planning.
What is an emergency corpus?
An emergency corpus is a segregated fund created for meeting any future contingencies that arise from any illness, job loss, death of any family member, delay in income, unexpected household expenses, etc. Hence, in case of any eventuality, the individual can fall back upon his/her emergency corpus.
Why is it required?
In the absence of any emergency corpus and occurrence of any unfortunate event, there are only two options left with the person, either they can dig into their future savings or can ask for help from other people or banks. This simply means welcoming more debt and increasing your liabilities.
Some individuals holding credit cards end up using this easy loan in times of emergencies which later on become disastrous for them as the interest rates levied by the banks are usually very high which ultimately results in soaring liabilities.
What is the ideal amount?
Well, it totally depends on your monthly expenses, spouse income, insurance, etc. Ideally, emergency corpus equivalent to 6-18 months of monthly expenses can be considered as ideal and would serve the purpose for most of the families. However, if you work in an industry where an employee’s turnover ratio is very high or if you are a professional or businessman where your income flows are very inconsistent then you may consider building a higher emergency corpus.
How to build an emergency corpus and where should you park?
Emergency funds cannot be built overnight and hence has to be built gradually. You can earmark a certain amount every month towards any liquid fund or a separate bank account to build an emergency corpus for yourself. Suppose you want to build an emergency corpus of say ₹ 3,00,000 then you can keep aside 10-20% of your monthly income towards it. Remember having an emergency fund is of utmost importance for every individual and hence it is okay if you invest less towards your future goals in the beginning. Once you build a requisite amount of corpus for emergencies then you can direct extra savings (which you were contributing every month to build emergency corpus) towards other investments.
Also, always remember to keep your investments in a liquid state and for that, you can park 1/3rd of your emergency corpus in online FD’s and 2/3rd part in a liquid fund. You may also direct a little portion of the total corpus in a savings bank account but remember that you will earn a very nominal return from it.