What they don’t tell you about the “emergency fund”!

Published: March 10, 2022 at 6:00 am

The emergency fund or a stash of money that is meant to handle unexpected expenses is one of the building blocks of personal money management. Yet, many aspects of it are not obvious unless we have first-hand experience. A discussion.

First the basics: We recommend putting away 20% of your take-home pay until you have accumulated an amount equal to six times your monthly expenses and then continue adding 10% to it.

Please recognise that an emergency fund is neither saving nor an investment. It is a simple cash holding. You can distribute it in different places. Some at-home; Some in your savings bank or current account. Some in an FD; Some in liquid fund etc.

Never use a credit card to handle emergencies unless you can pay the amount before the next billing cycle deadline. And if you cannot, redeem some investments/savings or borrow from relatives or sell some gold.

As we say in the Facebook group, Asan Ideas for Wealth, there are two types of people in this world. Those who have seen emergencies and those who have not. The former focus on ease of withdrawal and quantity. The latter focus on “returns”. Life can be a harsh teacher.


Build a complete financial plan with our Robo Advisory Tool. More than 1000 investors and financial advisors use it!
Get free money management solutions delivered to your mailbox! Subscribe to get posts via email! (Subscribers get exclusive discounts!)


New Tool! => Track your mutual funds and stocks investments with this Google Sheet!

Now why an emergency fund is recommended? When we have just started earning, our net worth is close to zero. We need to accumulate a small stash of cash quickly to handle emergencies.

So what is it that they don’t tell you about the emergency fund?

1) A emergency fund is necessary but (need not be) sufficient. Say you just got your first salary last month and put away 20% of your take-home in an SB account. The next day, you have an unexpected expense = 40% of your take-home. What will you do?

The first choice is to borrow from close relatives who are likely to offer you an interest-free loan and who you can pay back in instalments. Then you can consider selling stuff! Your bike; your mobile; some gold in the house etc. Options like a personal loan should only be used as a last resort.

In 2006, when my late father was hospitalized for the first time, I was a zero in money management. We had no health insurance and no emergency funds. My brother-in-law gave us an interest-free loan of 1 Lakh (for a start!). That was the first time I ever saw that much money. I told myself I should never ever find myself in such a situation (borrowing from relatives). It took me more than 5 years to get there. Everything needs a spark and that was my spark to learn about personal finance.

I hate to write it but another emergency can strike when you are paying off the loan obtained for the first emergency!

If we are lucky for a year or two, we can build a reasonable rainy day fund. This will allow us to continue investing without a break or without redemptions. Even if a small unexpected expense hits us, it is important to immediately replenish the fund at the cost of investing less for a few months if necessary.

2) “Six months expenses” is only a thumb rule!  Don’t believe it. You need more! A lot more. A single hospitalization is all it takes to learn the hard way. Whether you cover it with a corporate cover or individual mediclaim policy, you will need about 10-15% of the bill to cover for “non-medical expenses”. These include any non-medicinal accompaniments like gloves and personal care products. Such extensions could continue even after the patient comes back.

If your income (or job) is not stable and you wish to service a loan, ensure you have at least 2-3 months EMI stashed away over and above the “usual” emergency fund.

3) Your emergency fund is your net worth!  People often ask, “how much should I allocate as an emergency fund? Six months (6X) worth of expenses or twelve months (12X) worth of expenses?”

The truth is, 6X or 12X is merely the amount you allocate to cash. Your emergency fund at any point in time is your net worth! Hopefully, much of it is liquid and not locked up in real estate!

Suppose your monthly expenses are Rs. 30,000 and you have an emergency stash is ~ 6X or about two lakhs. You have built this up over two years or so and in this time, your investments have grown to about four lakhs. You get an unexpected expense of Rs. 3 lakhs. What will you do?

Redeem 2L from the stash and redeem 1L from your investments. But now your rainy fund has hit zero. So you will have to start rebuilding again. You cannot spend another two years to build it back to 2L. You will have to reduce your investments and divert them to the fund.

So what is the lesson here? We don’t know the extent of unexpected expenses. At any point in time, we should be ready to combat them with our entire networth. As our net worth grows, all this 6X, 12X business pales into insignificance. Most of our net worth should be liquid. That is not locked up into real estate, pension plans etc. Also see: Can you handle it when your entire wealth becomes an emergency fund?

4) The worst kind of financial emergency is an unexpected recurring expense. An emergency fund will not help you there and money management will go for a toss. When my mom fell down and broke her in Feb 2014, I had to hire a caretaker to tend to her during the day. Therefore monthly expenses suddenly increased by a significant amount. Investing enough for long-term goals became a challenge for more than two years. We still have the caretaker coming.

In summary, an emergency fund is an essential component of our daily lives. Just don’t expect life to throw at you proportional surprises. Once our net worth grows, we can breathe a lot easier. Until then, fortune and providence play a big role.

Do share if you found this useful
Enjoy special discounts on our 10th anniversary until May 31st!  
Explore the site! Search among our 2000+ articles for information and insight!

About The Author

Pattabiraman editor freefincalDr M. Pattabiraman(PhD) is the founder, managing editor and primary author of freefincal. He is an associate professor at the Indian Institute of Technology, Madras. He has over nine years of experience publishing news analysis, research and financial product development. Connect with him via Twitter or Linkedin or YouTube. Pattabiraman has co-authored three print books: (1) You can be rich too with goal-based investing (CNBC TV18) for DIY investors. (2) Gamechanger for young earners. (3) Chinchu Gets a Superpower! for kids. He has also written seven other free e-books on various money management topics. He is a patron and co-founder of “Fee-only India,” an organisation for promoting unbiased, commission-free investment advice.
Use our Robo-advisory Excel Template for a start-to-finish financial plan! Now with a new demo video!  More than 1000 investors and advisors use this!
Our flagship course! Learn to manage your portfolio like a pro to achieve your goals regardless of market conditions! More than 2800 investors and advisors are part of our exclusive community! Get clarity on how to plan for your goals and achieve the necessary corpus no matter what the market condition is!! Watch the first lecture for free!  One-time payment! No recurring fees! Life-long access to videos! Reduce fear, uncertainty and doubt while investing! Learn how to plan for your goals before and after retirement with confidence.
Our new course!  Increase your income by getting people to pay for your skills! More than 675 salaried employees, entrepreneurs and financial advisors are part of our exclusive community! Learn how to get people to pay for your skills! Whether you are a professional or small business owner who wants more clients via online visibility or a salaried person wanting a side income or passive income, we will show you how to achieve this by showcasing your skills and building a community that trusts you and pays you! (watch 1st lecture for free). One-time payment! No recurring fees! Life-long access to videos!   
My new book for kids: “Chinchu gets a superpower!” is now available!
Both boy and girl version covers of Chinchu gets a superpower
Both boy and girl version covers of Chinchu gets a superpower.
Most investor problems can be traced to a lack of informed decision making. We have all made bad decisions and money mistakes when we started earning and spent years undoing these mistakes. Why should our children go through the same pain? What is this book about? As parents, if we had to groom one ability in our children that is key not only to money management and investing but for any aspect of life, what would it be? My answer: Sound Decision Making. So in this book, we meet Chinchu, who is about to turn 10. What he wants for his birthday and how his parent’s plan for it and teach him several key ideas of decision making and money management is the narrative. What readers say!
Feedback from a young reader after reading Chinchu gets a Superpower (small version)
Feedback from a young reader after reading Chinchu gets a Superpower!
Must-read book even for adults! This is something that every parent should teach their kids right from their young age. The importance of money management and decision making based on their wants and needs. Very nicely written in simple terms. - Arun.
Buy the book: Chinchu gets a superpower for your child!
How to profit from content writing: Our new ebook for those interested in getting side income via content writing. It is available at a 50% discount for Rs. 500 only!
Did you know? We have more than 1000+ videos on YouTube to explore! Join our YouTube Community!

Want to check if the market is overvalued or undervalued? Use our market valuation tool (will work with any index!), or you buy the new Tactical Buy/Sell timing tool!
We publish mutual fund screeners and momentum, low volatility stock screeners .every month.
About freefincal & its content policy Freefincal is a News Media Organization dedicated to providing original analysis, reports, reviews and insights on developments in mutual funds, stocks, investing, retirement and personal finance. We do so without conflict of interest and bias. Follow us on Google News. Freefincal serves more than three million readers a year (5 million page views) with articles based only on factual information and detailed analysis by its authors. All statements made will be verified from credible and knowledgeable sources before publication. Freefincal does not publish any paid articles, promotions, PR, satire or opinions without data. All opinions presented will only be inferences backed by verifiable, reproducible evidence/data. Contact information: letters {at} freefincal {dot} com (sponsored posts or paid collaborations will not be entertained)
Connect with us on social media
Our publications

You Can Be Rich Too with Goal-Based Investing

You can be rich too with goal based investingPublished by CNBC TV18, this book is meant to help you ask the right questions, seek the correct answers, and since it comes with nine online calculators, you can also create custom solutions for your lifestyle! Get it now. It is also available in Kindle format.
Gamechanger: Forget Startups, Join Corporate & Still Live the Rich Life You Want Gamechanger: Forget Start-ups, Join Corporate and Still Live the Rich Life you wantThis book is meant for young earners to get their basics right from day one! It will also help you travel to exotic places at a low cost! Get it or gift it to a young earner.

Your Ultimate Guide to Travel

Travel-Training-Kit-Cover-new This is an in-depth dive analysis into vacation planning, finding cheap flights, budget accommodation, what to do when travelling, how travelling slowly is better financially and psychologically with links to the web pages and hand-holding at every step. Get the pdf for Rs 199 (instant download)
Free android apps