An emergency corpus or an emergency reserve is the foundation of a successful financial plan. According to experts, an emergency corpus is the starting point for anyone getting started with investments. Emergency corpus plays an important role in moving towards a secure life.
If you are among those who are planning to start investing or have just started, you need to know about the importance of having an emergency corpus. With that, you will have to find out how much is required for yourself and how to build your emergency corpus.
Why do you need an emergency corpus?
Suraj Shroff, Founder, Infiniti Investments says, “Emergency corpus gives us peace of mind and comfort as we know that in case of any sudden requirement, we have a corpus to fall back on. An emergency corpus is required at all points of time as it can cushion us during unexpected events such as medical requirements, job loss, car/appliance breakdown, etc.” Hence, having an adequate corpus helps us in keeping our long-term corpus safe. Otherwise, in times of need, you will have to dip into your savings, which can impact savings for important goals such as retirement and your children’s education.
Emergency corpus – How much is Good?
Experts say, for most people, an emergency corpus of between 6 to 12 months of living expenses should be sufficient. Having said that, one should start small, such as accumulating 2-3 months living expenses, as it is not possible to suddenly accumulate 6-12 month’s monthly living expenses, separately. Shroff, of Infiniti Investments, says, “For self-employed or freelance professionals, it is recommended to slowly accumulate a higher corpus of 12 to 24 months that includes living expenses and minimum operating expenses for the profession.” Note that, some of the factors to consider a higher corpus would include age, number of dependents, and type of work.
If you are confused about what to include in your living expenses while deciding the corpus, including monthly expenses such as all lifestyle expenses, EMIs, rent, any other fixed expenses that you may have. Once you arrive at this number, you can multiply the same to arrive at the corpus required.
How to build an emergency corpus?
Once you zero down on the total amount that you will have to accumulate, experts say, an investor should not be scared or worried by the number. An emergency corpus can be built over a period of time, allocating a portion of the income in a disciplined manner. Shroff, of Infiniti Investments, says, “One month’s equivalent of living expenses can be kept in the savings account and the balance can be accumulated in a low duration fund. The focus of this corpus is liquidity and accessibility.”
Here are some things to remember while building an emergency corpus;
– In case you use up a part of the corpus for any sudden requirement, you need to replenish the same as quickly as possible for future use.
– You can also use your credit card as an emergency corpus (but always repay the amount before the due date from the corpus).
– Have a health insurance cover to cover health-related emergencies.
– Revisit the corpus requirement in case of any changes to expenses, number of dependents, etc.
