A valuable guideline advised by financial experts is to maintain an emergency fund – a fund that consists of a sufficient sum of money saved to sustain living expenses for a period of three to six months. An emergency fund serves as a financial buffer specifically designated for unforeseen circumstances like medical emergencies, household repairs, or unexpected unemployment. It is crucial to keep your emergency fund separate from your regular cash flow to ensure that the funds are readily available when required.
However, many investors ask whether they should build an emergency fund or should directly start investing to build a corpus.
In his explanation about the significance of emergency savings, CA Nitin Kaushik emphasised the versatility of this fund in addressing unexpected expenses, whether big or small, that fall outside of regular monthly budgeting. He highlighted the vital role of an emergency fund in providing financial support during income disruptions without having to rely heavily on credit cards or loans to cover daily expenses.
Taking to the social media platform X, Kaushik noted the importance of establishing an emergency fund as an essential component of your overall financial management strategy, despite the initial inconvenience it may pose.
“A 6-month safety net = peace of mind. Losing your job is stressful, but having an emergency fund buys you time to focus on finding the right next step—without derailing your investment strategy. Yes, building an emergency fund might feel like a hassle, but it’s a key step in your long-term money management journey,” Kaushik wrote on X.
Here’s what he said about emergency funds:
1. What happens in an emergency?
Whether it’s a car breakdown or a boiler repair, without an emergency fund, you might be forced to dip into your investments at the wrong time.
2. Investments can fluctuate. In the short term, markets go up and down, meaning you could withdraw less than you invested when you need the money.
3. A 6-month safety net = peace of mind.
Types of emergency funds
How to Start Building an Emergency Fund?
Short-Term: This fund is designed to be smaller and easily accessible, providing enough funds to cover significant expenses promptly.
Long-Term: This fund represents savings that equal three to six months’ worth of living expenses. While saving this amount may appear challenging, it is attainable through careful strategic planning.
How to Start Building an Emergency Fund?
Animesh Hardia, Senior Vice President, Quantitative Research at 1 Finance, said before considering any investment strategy changes, building an emergency fund covering 6-9 months of expenses in liquid investments like arbitrage funds.
Determine a realistic target: Strive for an emergency fund that can cover expenses for three to six months. Calculate your necessary monthly expenses, including rent, utilities, groceries, transportation, insurance, and minimum debt payments.
Begin with modest steps: If the idea of saving this amount appears daunting, set smaller goals. For example, aim to save enough to cover one month’s expenses initially, then gradually increase your target.
Develop a financial plan: Monitor income and expenses: Document all sources of income and categorize your monthly expenditures. Utilize budgeting tools like apps or spreadsheets to effectively monitor your finances.