Follow these steps to create an emergency corpus for an unprecedented crisis
- A typical rule of thumb requires that an emergency fund meet survival needs of 6 to 12 months
- The amount that’s right for you depends on your financial situation
- Emergency funds create a financial reserve that can keep you afloat when needed without having to depend on credit cards or high interest loans
New Delhi: Today’s uncertain times have raised awareness of how important it is for people to have an emergency body that can cushion them in the event of a financial crisis. During this deadly pandemic, many people lost their jobs while millions suffered pay cuts that caused serious financial hardship for those who did not have contingency funds to fall back on.
The constitution of an emergency corpus is essential if you do not wish to draw on your long-term savings such as the retirement fund, the children’s education fund or resort to borrowing in the event of the unforeseen. When a person starts to make money, the first thing they need to do is create an emergency fund.
Size of the financial corpus:
According to financial planners, the size of an individual’s emergency corpus should equal four to six months of their monthly spending. For example, if your monthly expenses are Rs 50,000, the size of your emergency corpus should be between Rs 2 and Rs 3 lakh. This amount should be parked in such a place from where you can withdraw in the short term without erosion in the capital.
Follow these steps to build your emergency corpus:
1. Reduce your expenses: The first step is to cut unnecessary expenses in order to save more for the contingency fund. Reduce non-essential expenses like frequent meals, impulse purchases, etc. will allow you to reach your savings goals faster and possibly even increase the monthly allowance. Instead of eating out every week, cut it out
up to one or two outings per month, watch movies at home rather than at the theater, limit non-discretionary online purchases, etc.
2. Reallocate lump sum receivables: Did you receive a work bonus, a tax refund or a cash gift from a friend or relative? Set aside a small amount for fun and allocate the rest to your emergency fund. Adding windfall earnings can really help you speed up your goals. Rather than increasing your expenses with a salary increase, increase your contribution to the emergency fund, retirement corpus.
3. Profit recording, portfolio rebalancing and property consolidation: Markets are high and valuations are rising. At this point, some tactical asset allocation can help when the going gets cautious. If you have a property that is lagging behind that is not financially rewarding, selling it, even if you were to come out with a 15% discount off the market price, will help create that extra cash balance for the uncertainties. . If there has been an ongoing negotiation for a property, this would be a good time to consider selling it and increasing the liquidity position.
4. Safety and accessibility: When setting up an emergency fund, remember that the money in this fund is meant to help you get through a tough situation, which means you cannot deploy it wherever there is risk. short-term capital erosion. This means that equity or equity-based mutual funds or any other option with proportionately high risk should be avoided at all costs.
Another key point to remember is that most emergencies strike quickly and if you don’t have access to your emergency fund on time, there is no point. So make sure that the funds are easily accessible so that you can take care of the immediate expenses.
5. Reduce the debt and burden of EMI: If you are one of those employees who received a bonus in the past fiscal year, or a raise, then it would be good to use some extra money to reduce your debt. You can prepay your personal loan, car loan, or credit card loan. Once you have one less loan to worry about, you can spend more money on building your emergency corpus.
Due to the pandemic, working from home has become the new normal. If your business also makes you work from home, moving back to your hometown where you live with rent means you can save money on rent and use that amount to build your emergency fund.