Why To Maintain An Emergency Corpus

Why To Maintain An Emergency Corpus

Indian Market
by 5paisa Research Team Last Updated: 2022-03-30T12:53:23+05:30

What is an emergency corpus?

An emergency corpus or fund holds liquid money set aside for emergencies and unforeseen situations. It is a cushion to fall back on during contingencies like a job loss, critical medical issues, delay in income, or, in worst case scenario, death.

These emergencies or situations can be classified as short-term and long-term. A short-term emergency could be a healthcare expenditure or a delay in receiving one’s salary, whereas a long-term emergency could be a job loss. For small trading businesses, an emergency fund is essential as it offers security.

In many instances, traders recklessly invest a large portion of their personal funds into their business. Due to the volatile nature of the stock markets, it is difficult to guarantee if the invested funds would result in profit or loss. There are instances where even the smartest traders have become bankrupt. An emergency fund is mandatory to brace such calamities.

One of the reasons small businesses fail is due to the dangers of taking short-term credit, i.e. availing loans on credit cards or unsecured personal loans. The high rates of interest charged on these loans, however, eat up into the trader’s turnover.

Plan your emergency

The emergency fund should be a pivotal part of your business plan. However, it is just as important to understand when the fund should be used. It is essential to have a list of events that you consider grave enough to access your emergency fund. These could entail:

  • A sudden volatility in the market
  • Economic crisis or downturn
  • Personal disability or health emergency
  • Natural or man-made disasters

Regardless, not every unforeseen event should be considered as an excuse to use up the emergency fund. It is important to be crystal clear of your reasons to use the emergency fund.

On the other hand, maintaining an extra liquid asset apart from the emergency fund would also help you make the most of profitable opportunities. For instance, investing in a good IPO or an event-driven stock trade. Liquid assets make your business sturdier and more adaptable.

Maintain separate accounts

Just as your personal account is separate from your business account, your emergency account should also be separate from your business account. This will reduce the temptation to utilize the emergency fund during ‘non-emergencies’. To reiterate, the emergency fund should be kept off limits except for certain set of circumstances.

A savings account is a good place to save the emergency fund. Never keep your emergency funds in a form that might attract a penalty for early withdrawal or those that would take time to liquidate. It is tempting to place it in a fixed deposit scheme, but remember that liquidity is the motto. Even putting it in a mutual fund could risk its value.

The amount

The thumb rule for a personal emergency fund can be applied here. For starters, you must save at least three months of operating expenses as an emergency fund. To do this, the total monthly expenses of your trading business should be calculated. The expenses should include your monthly investment amounts, brokerage charges, and other miscellaneous expenditure.

If you are a trader who takes high risk, then the emergency fund has to be tweaked accordingly.

Depending on your risk appetite and calculations, you can create a fund that covers three-six months of your expenses. Once you are prepared for every eventuality, your mind will be at peace and you can be more confident with your trades in the future.

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