Five tips to build emergency corpus for uncertain times
New Delhi: After going through the unprecedented lockdowns and massive health crises in the wake of COVID-19, it is quite clear that emergencies can occur anytime without any warning signals. This is the biggest reason why people have grown more conscious about prudent money management and creating emergency funds.
According to financial planners, the size of an individual’s emergency corpus should be equal to four-six months of their monthly expenses. For example, if your monthly expense is Rs 50,000, then the size of your emergency corpus should be anywhere between Rs 2 to Rs 3 lakh. This amount should be parked in such a place from where you can withdraw at a short notice without erosion in the capital.
Follow these steps to build your emergency corpus:
1. Trim your expenses: The first step is to cut out unnecessary expenses so as to save more for the contingency fund. Cutting down on the non-essential expenses like eating out frequently, impulse shopping, etc. will allow you to get to your saving goals quicker, and maybe even increase the monthly allocation. Instead of eating out on a weekly basis, cut it
down to one or two outings a month, watch movies at home instead of cinemas, limit non-discretionary online shopping, etc.
2. Reallocate lumpsum receivables: Have you received a bonus at work, got a tax refund, or cash gift from a friend or a relative? Set aside a small amount to enjoy yourself, and allocate the rest to your emergency fund. Adding any windfall gains can really help fast-track your goals. Rather than increasing your expenses with an increase in salary, increase your contribution to the emergency fund, retirement corpus.
3. Profit booking, portfolio rebalancing and Consolidating properties: Markets are high and valuations are up. At this point, some amount of tactical asset allocation can help you out when the situation changes to cautious. If you have a property lying around that is not financially rewarding, selling it, even if one were to exit at a 15% discount to market price, will help create that extra cash balance for 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. Security and Accessibility: While creating emergency fund, remember that the money in this fund is to help you through a tough situation which means that you cannot deploy it anywhere where there is risk of capital erosion in the short term. This means that equity/equity-based mutual funds or any other option with a proportionately high risk should be avoided at all costs.
Another key point to remember is that most emergencies strike fast and if you do not have timely access to your emergency fund, it is pointless. So, ensure that the funds are conveniently accessible so that you can take care of immediate expenses.
5. Reducing debt and EMI burden: If you are one of those employees who have received a bonus for the past financial year, or an increment in salary, then it would be good to use to extra money to reduce your debt. You can prepay your personal loan, auto loan or credit card loan. Once you have one less loan to worry about, you can put more money towards building your emergency corpus.
Because of the pandemic, work from home has become the new normal. If your company is also having you work from home, moving back to your hometown from where you live on rent will mean that you can save rent money and use that amount to build your emergency fund.