What is an Emergency Corpus?
Simply put, an emergency corpus is like a cash reserve which is set aside to meet any unplanned expenses or financial emergencies. Or, if a person stops earning income for a temporary tenure, funds accumulated in an emergency corpus can come to the rescue.
For instance, when the COVID-19 lockdowns took place, and the economy came to a standstill, many people were laid off from their jobs or were forced to take substantial pay cuts. But people who had already built an emergency corpus could sail off relatively easily than those who had saved nothing.
Such is the importance of an emergency corpus!
How Much Amount Should One Keep in an Emergency Corpus?
While there is no thumb rule as to how much one should keep in his/her emergency corpus, it could range somewhere between six to twelve months of the monthly expenses.
It becomes essential to consider that your emergency corpus should be placed in the most liquid instruments, such as a savings account or a money market mutual fund. Emergency funds should not be invested in stocks or bonds.
This is because emergency funds mostly come to use during recessionary phases. And during these times, stocks and bonds might be trading at depressed prices, forcing you to liquidate your corpus at lower levels. Also, your corpus will decrease in value with such a move, which might be insufficient to cover your expenses!
How to Accumulate the Desired Amount?
Income – Savings = Expenses.
This should be the default equation if you want to manage your finances well!
Like you allocate a percentage of your income to investments in stocks or bonds, you can allocate a certain percentage each month towards your emergency corpus.