Charles Dickens once said, “There is nothing so strong or safe in an emergency of life as the simple truth.”

So, how do you build a safety net for unexpected turns in life?

In this blog, we break down what is an emergency corpus, why it’s essential, how to set it aside, and why you should avoid investing it in risky assets.

What is an Emergency Corpus?

An emergency corpus is a dedicated fund set aside to cover unexpected financial emergencies.

These emergencies can include:

Medical Expenses

Unexpected health issues can arise for you or your family members.

Loss of Employment

Sudden job loss can disrupt your regular income.

Natural Calamities

Events like floods, earthquakes, or hurricanes can cause significant damage.

Pandemics

As seen with the COVID-19 pandemic, such events can lead to unforeseen expenses and financial burdens.

Why Create an Emergency Corpus?

The COVID-19 pandemic brought into focus the need for an emergency corpus. Many individuals found themselves facing substantial hospital bills while dealing with job losses.

Having an emergency corpus can help you weather such storms.

How Much Emergency Corpus Is Sufficient?

There’s no one-size-fits-all answer to this question.

To determine how much you should have in your emergency corpus, start by analyzing your current income and expenses.

Next, create a budget that allows you to save a portion of your income regularly.

Typically, 6-12 months of expenses can be maintained as emergency funds.

Where to Keep Your Emergency Corpus?

Once you’ve decided on the amount, create a separate account for it.

Maintain the funds in assets which can be easily liquidated in times of emergencies, such as:

Liquid Funds

Liquid funds are a category of debt funds characterized by their investment in extremely short-term assets, with maturities typically ranging up to 91 days.

These funds focus on highly liquid debt and money market instruments.

Fixed Deposits

Fixed Deposits, commonly known as FDs, are a type of time-bound savings account characterized by their attractive feature of providing higher interest rates.

This financial instrument has long been favoured by investors seeking a secure and reliable means to grow their savings while preserving their principal amount.

Savings Account

A regular savings account is a convenient and easily accessible choice when it comes to building your emergency corpus.

With its simplicity and accessibility, it provides a straightforward way to save for unexpected expenses, ensuring that your financial safety net is readily available when you need it most.

Should You Invest Your Emergency Funds in the Stock Market?

The primary purpose of an emergency corpus is to provide financial security when you need it most.

Therefore, it’s not intended for generating high returns or taking investment risks.

Avoid investing your emergency funds in risky assets like the stock market, as the focus should always be on maintaining liquidity.

Conclusion

Building an emergency corpus is an essential part of financial planning. In times of crisis, having a financial safety net that can help you navigate challenging situations.

There is no one-size-fits-all solution for the ideal amount to save, so it’s essential to assess your unique financial situation and create a plan that works for you.