4 reasons why creating an emergency fund should be a top priority for every investor?

POSTED BY manish ON December 22, 2008 COMMENTS (18)

Planning your financial life does not mean planning for your long term financial needs only, It will be incomplete unless you keep an emergency fund for the unexpected emergency situations.

In this article i will tell you why it is important to keep emergency fund and how much of this fund you should keep aside.

emergency-fund-importance

What is Emergency fund?

Emergency fund is the money that you should keep aside, so that you can use it in case you meet up with some sudden financial surprises, for example –

  • Unexpected medical expenses
  • Job loss
  • Vehicle repair or home decor
  • Helping someone close in his need
  • Unplanned traveling or entertainment expenses
  • Any financial crisis etc.

Emergency funds are not to satisfy the daily expenses and basic needs, it is a support that you will have when you really need it in your hard time.

Why is is essential to have an emergency fund?

Having an emergency corpus must be the priority for everyone while planning for a great financial life. Let’s see some of the impacts of having emergency fund on your personal and financial life.

1. Helps you to keep your stress level low

When your know that you have an emergency fund, you can live a stress-free and relaxed life. Because you know that you have a backup plan and so if any emergency pop-ups you are already ready to face it.

2. No need to take an emergency loan

Taking a loan or asking for money in your hard time can sometime hurts your pride. Having an Emergency fund will be helpful not only to solve the problem but it also protects your self-esteem.

3. Don’t have to redeem from your future savings

Your savings are related to some very important future goals of yours. Contingency fund will help you to protect those dreams of yours by satisfying your today’s emergency need.

4. No need to cut your essential expenses –

It happens with most of the people, they have to sacrifice their expenses though they are important, to collect money for their unplanned or emergency expenses. Having an emergency will be a helpful hand in those difficult times of yours.

Why it makes sense to have an Emergency fund?

With the global slowdown, there are many cases of unexpected job losses in the field of Finance, IT, Manufacturing and many others. You never know when you will be without job.

Lets take two scenario when you loose your job and you either had Contingency funds and you did not, Let us see what happens in these two cases.

Case 1: You do not have contingency Funds: Put yourself in this Situation, Close your eyes and try to think about this situation, How do you feel?

Your Family depends on you, all your family expenses are met with you salary, now you loose your job!! What if you don’t find another job soon? In this situation you have a heavy pressure on you to anyhow find a new job as soon as possible, You need a JOB !! and not a “good” or “appropriate” or “Dream” JOB.

If you find a job, but you don’t like it or wanted to do it .. still you will have to take it because of the pressure of “finding a JOB because of others depending on you” …

You compromise on Salary, Company and your wishes. Why does this happen? This happens because you cant wait, because you don’t have the to survive of another 1-2-3 months. You know that you can wait a little more and find a good job suitable for you, but you cant wait.

Case 2: You have Sufficient Contingency Funds: This case is just the opposite of what we discussed above. When you have sufficient CF, you have a relief in mind that you have sufficient time to find a good job without compromising your family needs.

You don’t feel the pressure to get the job ASAP. Though you have to find a good job soon, its not necessary that you take any shitty job which comes your way …

See this Video too …

How to start saving for Emergency fund?

1. Pre-decide your monthly expenses –

Plan your monthly expenses. Try to control your expenses as much as possible, so that you can save money to invest in your emergency fund. Today’s unnecessary expenses can have a bad impact on your savings for your contingency fund.

2. Set an auto deduction towards emergency fund –

When you set an auto-deduction for your emergency fund at the start of the month, you will not have any regret at the end of the month for not saving anything for your unexpected emergencies.

3. Don’t touch the emergency fund for quick needs or smaller crisis –

Lot of people do this mistake, they use their emergency corpus for the some very small emergencies which they can handle with their routine expenses also. You should criticize the situation and

4. Save for emergency before investing in long term goals –

You long term investments are related to your specific goals. So it is obvious that you have as emotional attachment with those investment and you don’t want to touch that money for any other purpose. If you have an emergency fund, then you don’t need to use the money you have invested for your future dreams.

Besides, some long term investment have lock-in period, so if you want to redeem your money before completing the maturity time period, you will have to pay some penalty charge.

Where to have Contingency funds?

As per the name, it can be seen that this amount is required at the time of unforeseen situation which can happen anytime,so it must be parked at some liquid avenue like Bank account or Liquid funds.

If you are keeping 4 months of funds as CF, then you can keep 1 month money in Cash and rest 3 months money in Liquid funds.

Summary: Contingency Funds are the part of Risk management. And risk management is something no one should avoid. People realize its importance only when they plan for it and get trapped in a situation which demands Contingency funds. ..

So now its your turn. Plan for it, be ready for unplanned emergency, and secure your future.

What do you feel after reading this article? Do you agree with this?

do let us know what do you think about the concept of emergency fund and also your view on this article in our comment section.

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18 replies on this article “4 reasons why creating an emergency fund should be a top priority for every investor?”

  1. Chetan Ambi says:

    Yes.. I feel CF is must for everyone..

  2. Vivek says:

    HI manish

    It been a months that i have become a regular visitor of your website and have been reading older articles just to get more knowledge about different aspects of investing.

    I also believe that CF should an important factor for every investor to consider in his/her portfolio. I learnt it in a hard way, as i had no money when there was a medical emergency at home. But they say its always good to learn from your mistakes.

    I have started an SIP in Franklin Templeton India Short Term Income Plan. Besides if i get some lumsum amount i prefer to make an FD.

    I personally believe when you plan for future, always make a plan for hard times too. As being helpless in hard times hurt you more.

    Cheers for your good work,

    Regards
    Vivek Rawat

    1. Yes Vivek

      Incase of emergencies , you will really learn its importance

  3. Vikrant says:

    Hi Manish
    Though least read article, but I think this should be a part of financial planning.
    I have doubt regarding investment of CF. Now a days there are Auto Sweep Saving Account wherein amount above some limit (decided by account holder) is deposited at fixed deposit rate. Liquidity of this amount is more compared to liquid funds (In-Out of amount in Auto Sweep Saving Account is fully automatic and does not require any instructiions from account holder) . But i am sure which option is better wrt returns? Since fixed deposit rates changes as per RBI rules and I have no idea about returns from liquid funds.
    Please suggest which option shall be chosen?

    1. Vikrant

      Yes .. Sweep in accounts have better returns, but just make sure you know that there will be too many entries in your bank statements . Go through this article and all the comments : https://www.jagoinvestor.com/2011/03/auto-sweep-bank-account.html

  4. Veman says:

    Hi Manish,
    I have accumulated 75K as part of CF. Now i want to park these in liquid funds,where i can get little extra returns than in savings account.
    Do you have any suggestions on how to select a best liquid mutual fund?
    any other suggestions are welcome.

    1. Veman

      HDFC liquid funds is a good one .

      Manish

  5. Hitesh says:

    Hi Manish,

    I want to build a contingency fund of about Rs 1 lac. i shall accumulate this amount as and when i am able to save it. At present i am having 10000 to start with. I was looking to invest this amount in a liquid fund. can u suggest me a good fund wherein i can invest as and when i want ?

    Regards

    Hitesh

    1. I think first you accumulate 1 lac, how much time will you take to accumulate it , if its less than 6 months , then better keep it in bank account itself and then in lumpsum out it in liquid fund or wherever, it would be less hassle and no major left out on returns .

      Manish

  6. Neelesh says:

    There are two important things which should be considered for CF first one is liquidity and second one that they will be able to cope up with inflation based on these which type of (mutual) fund will be suitable for CF.

    Apart from this for a government employee whose job security more or less is not an issue how much CF should be required?

    Neelesh

    1. Neelesh

      I would put bigger stress on the liquidity front as its the main thing in CF . For seniors , a higher CF is required , i would say 1 yr

      Manish

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  8. Manish Chauhan says:

    @Anu

    Hmm.. yeah I would say if both are working then you can have 2 months of Expenses in Bank for Liquidity . The main idea is to have enough cash available to put food on your table for next 4-5 months even if you loose your job . So the worst case will come only when both the people loose the job .

    Manish

    1. vidya says:

      I have just started reading up articles on this site, so adding my comment quite late!

      I would just like to add that even if both the partners are working, personally I think it is very essential to keep aside a contingency fund. Sometimes really unexpected things do happen (much beyond our control) and then this fund would be …. you will just be thankful that you kept it. So while you always hope for the best, be prepared for the worst also.

      1. Vidya

        Yea .. emergency funds should be created anyways 🙂

        Manish

  9. Anu says:

    May be it is too late to comment on this article but i am catching reading all the article i missed. These days in most of the family both husband n wife are working so i dont see the need to save for this fund more than one month salary incase. U think it is ok not to have CF if both are working ?

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