How can a three-layered emergency corpus help you ride out emergencies?

'Save for the rainy days' isn't just a phrase; it's a necessity. Since emergencies often knock on our doors without warning, it's crucial to be financially prepared for them. Which is why you need to have an emergency fund or an emergency corpus. So, let's look at how organising your corpus in three neat layers can ensure quick access to funds when you need them the most.

What does a three-layered emergency fund look like?

Here's how a three-tiered emergency corpus helps you balance liquidity, safety and returns efficiently.

Layer 1: Cash in hand

This is the cash you usually keep and is the easiest way to access funds. Though the money doesn't earn any interest, it provides immediate access during unforeseen circumstances. Depending on your situation, having enough cash to cover one month's expenses can be prudent.

Layer 2: Bank accounts and sweep-in deposits

The next layer is the money lying in your savings bank account. These funds can be accessed through your debit or ATM card.

You can also sock away some money in a sweep-in deposit linked to your savings account. Though they act like fixed deposits (FDs), sweep-in deposits are automatically liquidated when the account balance falls below a certain threshold. This allows quick access to your money while earning a higher interest rate than a typical savings account.

Layer 3: Liquid funds

The third layer of your emergency corpus can be in liquid funds. These funds generally offer better returns than FDs. And unlike bank deposits, liquid fund returns are taxed only upon redemption.

Though liquid funds don't guarantee returns or the safety of capital, they carry a low risk. Redemption is quick, and the money is usually transferred to your account within 1-2 working days.

How big should your emergency fund be?

The size of your emergency corpus should be based on your needs. Factors such as the number of dependents, income sources, existing liabilities, etc., determine how big your emergency fund should be.

Typically, having an emergency fund covering at least six months of your expenses is considered ideal.

Summary

To reiterate, since having an emergency fund is essential, adopting a three-layered approach - i) keeping some cash on hand, ii) using bank accounts and sweep-in deposits and iii) investing in liquid funds -ensures your emergency corpus is accessible and secure when you need it the most and also helps you earn modest returns on your money.

Also read: Have Rs 0 savings? Worry not, you can still retire in 15 years

This article was originally published on October 22, 2024.