A contingency corpus is your defence against unforeseen circumstances, such as a medical exigency or job loss. Here are the points to keep in mind while setting up one for yourself.
1) Do you really need an emergency fund?
The importance of setting up such a fund cannot be exaggerated. Everybody should have one, though some don’t need to put away the requisite amount if they have enough assets. It is often argued that you don’t need emergency cash if you have a credit card. A credit card does come in handy when you face a financial crisis, but the cushion that plastic money provides lasts only 15-30 days, till the bill arrives.
2) How big should the corpus be?
Your emergency fund should be large enough to take care of your living and other essential expenses, such as house rent, school fees, health care and
3) Where should you
There was a time when
4) Should you consider equity-based options?
Investors are unlikely to find the 6-7% offered by sweep-in bank accounts and short-term debt funds too attractive. After all, the
5) How to save for the contingency fund?
Don’t try to build the corpus too quickly. It will be a burden on your cash flow and derail other plans, such as saving for retirement or child’s education. If you haven’t already established an emergency fund, start putting away 10-15% of your monthly income for this purpose. This will help you build a corpus in about two years. Any windfall gain, such as a tax refund or an annual bonus, should also be diverted to it. However, it is important that this amount be treated as sacrosanct. Under no circumstances should you dip into it for discretionary expenses.