How and where to set up an emergency corpus

It’s no secret that life is full of uncertainties. There are many contingencies that can come your way, out of the blue. The recent job losses in the economy due to the COVID-19 crisis just exemplifies that fact. Aside from job losses, there are many other financial emergencies that you may face. Illness, accidents, manmade or natural disasters and a sudden death in the family are all other such unforeseen incidents that could throw your finances out of track.

It’s in situations like these that an emergency corpus can be of great help. But if you’re a beginner just getting started with your financial journey, you’re perhaps not very sure about how and where to set up your emergency fund. Let’s discuss these details here, so you can make smarter financial decisions that can help you sail through emergencies smoothly.

How to set up your emergency corpus?
An emergency fund is not set up overnight. It takes time to build up this corpus. The key to getting your emergency corpus ready is consistency. Here’s a quick set of pointers that can give you a better idea of how to go about setting up your emergency corpus.
Draw up a budget to understand how much you have left to save and invest.
Figure out how much you need to build up as your emergency corpus.
Allocate a particular portion of your savings for your emergency funds.
Keep revisiting your target and track how far along on the progress scale you are.

How much should you save up as your emergency fund?
This is a very subjective issue. There’s no right or wrong amount to save up. However, if you’re looking for a good rule of thumb to help you get started, you could start by creating a fund that’s enough to get you through six months. So, for instance, if your monthly salary is Rs. 40,000, you could begin by creating a fund worth Rs. 2,40,000.

Funds need to also be suited to meet your short-term and your long-term needs. A short-term corpus should be easy to liquidate, while a long-term emergency corpus could include investments that take a few days to liquidate.

Where to set up an emergency corpus?
Now that you know how to set up an emergency corpus and how much to save up, it’s time to look at the next big question – where should you put your money? Fortunately, there are many options that you can choose from. Let’s look at some of them.

High-yield bank accounts
Your regular savings account is a great place to start setting up your emergency fund from. However, do take care to ensure that your emergency funds don’t get merged with your regular savings. For this purpose, it’s advisable to have a separate savings bank account that acts as your emergency fund. It’s also advisable to choose a bank or a financial institution that offers a high rate of interest on your funds, so they can grow even when they’re idle.

Certificate of deposit
A certificate of deposit (CD) is a slightly less liquid option than a regular savings account, so you can consider this alternative for your long-term emergency corpus. CDs with commercial banks have a maximum tenure of 1 year, while CDs with other financial institutions can be held up to 3 years. You can invest in multiple CDs and time your investments such that they mature at different times, making cash available to you at different points over the course of the year.

Open-ended funds
If you’re looking for a more risk-aggressive option, open ended mutual funds can be another alternative to consider. You could opt for open-ended debt funds, so your corpus is safe from vast market fluctuations while still being easily available to withdraw. Investing in a hybrid open-ended mutual fund may also be a good choice. However, do keep in mind that since funds are market-linked, it’s a smart idea to supplement them with other avenues of emergency funds.

Gold as an investment
Gold as an investment is versatile, liquid, and comes bearing low to medium risk only. These features make gold an ideal choice for investment if you’re looking for a more tangible way to save up for emergencies. You can also invest in the yellow metal digitally by opting for e-gold. The advantage of e-gold is that it’s more secure and there are no storage costs associated with it. So, if you’re considering gold as an investment for emergencies, you could opt for physical gold or e-gold.

These are just some of the many ways in which you can set up your emergency corpus. The key is to start early, even if it means starting off small. Over time, you’ll build a corpus that’s large enough to get you through any storm that life brings your way.