Why an emergency fund is the foundation of investing

Published: January 12, 2021 at 4:32 pm

Last Updated on January 16, 2021 at 6:35 pm

In this article, Sarthak Parikh explains the importance of an emergency fund; how much is necessary; where to park it and how the pandemic has increased the need for a robust emergency fund.

COVID-19 has hit us all hard in ways that we had never envisaged. The fear of losing a job if you are an employee or losing your business income if you are an entrepreneur has never been as real as it is at this point in time.

I live in Ahmedabad, the financial capital of Gujarat and India’s 7th largest city. It does not have a nightlife due to obvious reasons known to everyone but what it can boast of is lots of good restaurants, cafes and thali places.

I can vaguely estimate that 2019 was the year when an unprecedented number of these places burst into the Ahmedabad food scene than any other year in the past. However, with the most stringent lockdown that had hit all of us this year, the number of these newly opened food joints that have shut down in the last 3 months has also been huge.

Join over 32,000 readers and get free money management solutions delivered to your inbox! Subscribe to get posts via email!
🔥Enjoy massive discounts on our robo-advisory tool & courses! 🔥

I am sure you can paint a picture in your head now. Most of the staff being laid off, budding entrepreneurs who invested their monies forced to shut off their dreams. In these unforeseen emergencies, emergency funds give you a much-needed cushion. Imagine if you stumble upon an oasis in a desert when you had absolutely no water to get through your days of arduous travel. An emergency fund is that oasis in the world of personal finance, the one which will help you tide over tough times.

I am a person with no background in finance. But ever since I landed my first job, I have made it a point to read as much as I can on personal finance. What I do know is of the basic pillars of personal finance emergency funds are amongst the most important. Even an amateur science student in me understood in 2013 that after getting a Term and a Medical cover, you should put all your might into gathering that coveted emergency fund.

It took me 2 years to gather my emergency fund after landing my job. I kept aside a fixed sum of money every month for 24 months. There have been plenty of instances wherein I have seen friends and relatives struggle with unforeseen circumstances wherein there was a requirement of urgent money.

However, due to lack of proper financial planning, they had to take the help of other people. This is one of the most unfortunate situations an individual can find him/herself to be in. An emergency fund will help you in scenarios like these and save you from embarrassment.

There are different points of view on how much money one should put into an emergency fund. Experts are of the opinion that anywhere from 6 months to 1 year of your monthly expense should be the amount that should be kept in an emergency fund. I would not like to debate on what the experts say, but I have a slightly diverse view on this.

I am of the opinion that one should have that much amount in one’s emergency fund that lets one sleep at night peacefully without fearing for a job loss or an impending medical emergency. This amount can be your 1-year expense or your 5 years worth of expense; the decision is solely based on you. Another aspect that can also be taken into consideration is also on having faith in your skills and abilities. Imagine if you were fired from your job right now, considering your experience and your skillset what would be the timeframe that you would need in getting a new job? Answering questions like these will help you in deciding on your emergency fund. You can also factor in your monthly SIPs along with your expenses when you are building your emergency fund. Hampering your investments even for a short duration of time can have an effect on your final corpus.

Personally speaking, even with absolutely no impending doom of a job loss, I would be lying if I said the fear of losing it did not cross my mind. COVID-19 has shattered some of my previous notions on emergency funds. I have used this time to divert parts of my salaries in strengthening it. Redeeming equities during emergencies is a bad idea. You will be seriously hampering the compounding, and you will be putting your goal achievement in jeopardy. Having some funds parked safely and separately for a rainy day is extremely important.

Where should the emergency fund be parked? Savings bank account, Fixed deposits, Liquid funds are some of the safest options, and more importantly, they are liquid. You should have access to your funds in an extremely short period of time. Returns are not a criterion in choosing where to park the emergency fund, safety and liquidity is. So do not run after that extra 2% return where your capital is put at severe risk. When it comes to your emergency money, it is better to be safe than sorry.

I go back to my initial thoughts on those employees who have been laid off and the entrepreneurs who had to give up on their dreams and shut off their restaurants. I am not a soothsayer, and I cannot predict that having emergency funds would have been the answer to all their problems. However, I do feel they would have slept peacefully if they had some amounts saved for a rainy day.

Do share this article with your friends using the buttons below.

🔥Enjoy massive discounts on our courses, robo-advisory tool and exclusive investor circle! 🔥& join our community of 5000+ users!
Use our Robo-advisory Tool for a start-to-finish financial plan! More than 1,000 investors and advisors use this!
New Tool! => Track your mutual funds and stock investments with this Google Sheet!
We also publish monthly equity mutual funds, debt and hybrid mutual funds, index funds and ETF screeners and momentum, low-volatility stock screeners.
Follow Freefincal on Google News
Follow Freefincal on Google News
Subscribe to the freefincal Youtube Channel. Subscribe button courtesy: Vecteezy.
Subscribe to the freefincal Youtube Channel.
Follow freefincal on WhatsApp Channel
Follow freefincal on WhatsApp
Podcast: Let's Get RICH With PATTU! Every single Indian CAN grow their wealth! 
Listen to the Lets Get Rich with Pattu Podcast
Listen to the Let's Get Rich with Pattu Podcast
You can watch podcast episodes on the OfSpin Media Friends YouTube Channel.
Lets Get RICH With PATTU podcast on YouTube
Let's Get RICH With PATTU podcast on YouTube.

  • Do you have a comment about the above article? Reach out to us on Twitter: @freefincal or @pattufreefincal
  • Have a question? Subscribe to our newsletter using the form below.
  • Hit 'reply' to any email from us! We do not offer personalized investment advice. We can write a detailed article without mentioning your name if you have a generic question.

Join over 32,000 readers and get free money management solutions delivered to your inbox! Subscribe to get posts via email!

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 ten years of experience publishing news analysis, research and financial product development. Connect with him via Twitter(X), 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 promoting unbiased, commission-free investment advice.
Our flagship course! Learn to manage your portfolio like a pro to achieve your goals regardless of market conditions! More than 3,000 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 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 700 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 and pays you! (watch 1st lecture for free). One-time payment! No recurring fees! Life-long access to videos!   
Our new book for kids: “Chinchu Gets a Superpower!” is now available!
Both boy and girl version covers of Chinchu gets a superpower
Both the boy and girl-version covers of "Chinchu Gets a superpower".
Most investor problems can be traced to a lack of informed decision-making. We 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, what would it be if we had to groom one ability in our children that is key not only to money management and investing but to any aspect of life? 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 parents plan for it, as well as teaching 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 is for those interested in getting side income via content writing. It is available at a 50% discount for Rs. 500 only!
Do you want to check if the market is overvalued or undervalued? Use our market valuation tool (it will work with any index!), or get the Tactical Buy/Sell timing tool!
We publish monthly mutual fund screeners and momentum, low-volatility stock screeners.
About freefincal & its content policy. Freefincal is a News Media Organization dedicated to providing original analysis, reports, reviews and insights on mutual funds, stocks, investing, retirement and personal finance developments. 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 with credible and knowledgeable sources before publication. Freefincal does not publish paid articles, promotions, PR, satire or opinions without data. All opinions will 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 and seek the correct answers, and since it comes with nine online calculators, you can also create custom solutions for your lifestyle! Get it now.
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 into vacation planning, finding cheap flights, budget accommodation, what to do when travelling, and 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 300 (instant download)