Emergency fund: Why it's crucial to have one

" What's yours is mine, and what's mine... is also mine ," said every controlling partner ever.

A family friend reluctantly agreed to an arranged marriage after years of resistance. Surprisingly, her fiancé checked every box - smart, career-oriented, respectful, and chivalrous (impressive, considering it's dead).

They got married and moved in together, living the life of every Instagram couple you've hated.

But time reveals all truths. Laundry days turned into "I forgot", cooking became her default job, and the dishes, a battle of who could ignore them longer. His salary was "for the future", and hers covered "day-to-day expenses." They realised their "perfect" match was just two incompatible people forcing a fit.

A year in, conversations turned into arguments, date nights disappeared, and their 'forever' became a countdown to who would leave first.

Eventually, he did. Thankfully for her, she had a stable job and her family to fall back on.

Many women don't. Economic abuse - controlling money, taking salaries, influencing financial decisions, taking loans and debts in the wife's name, etc. - is so normalised that people ignore how crippling it is for the women who have to go through it.

In such cases, an emergency fund isn't just money; it is freedom and security. It makes overcoming adversities, whether domestic, romantic, occupational, medical, etc., possible.

So let's discuss what an emergency is and how to set up a fund for it.

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Let's define emergency

An emergency is a financial event that can shake your stability and security. It doesn't mean extra cash you can use for just any tricky situation. To help distinguish real emergencies from unnecessary spending, consider the following.

What an emergency fund is for

1. Job loss or income disruption : Career breaks, layoffs, or unpaid maternity leave.

2. Medical emergencies : Whether it's an accident, sudden illness, or even therapy costs that aren't covered by insurance.

3. Leaving a bad situation : A toxic workplace, an unsafe relationship, or a home environment that is no longer secure.

4. Family obligations : Medical care for parents, childcare expenses, being a financial safety net for another, etc.

5. Legal or housing emergencies : Sudden rent hikes, a deposit for an independent place, or legal fees in cases like divorce or custody battles.

6. Essential big-ticket repairs : A broken laptop when you freelance, a car repair when it's your only mode of transport — anything that directly impacts your ability to earn or function.

What an emergency fund is NOT for

1. Investments: Investing is for wealth-building, not emergencies. Your emergency fund should be safe, stable, and accessible.

2. Lifestyle upgrades : A bigger apartment, a flashier car, or a last-minute luxury getaway.

3. Non-urgent expenses disguised as emergencies : A sale on something you "need eventually" is not an emergency. A flat tyre that can wait a few days? Also, no.

4. Funding others at the cost of yourself : Generosity is admirable, but if covering someone else's expenses puts your own stability at risk, then that's not financial empowerment — it's self-sabotage.

An emergency fund prepares you and backs you up for the worst. It doesn't mean you will face it, so there's absolutely no reason to be scared of having it.

Now, let's talk about how much this safety net costs.

Suggested read: Should I include the emergency fund in my asset allocation plan?

How much should you save? The 3-6-12 rule

Your emergency fund should be big enough to keep you afloat but realistic enough to build without stress. Enter the 3-6-12 rule. Here's how you can calculate your emergency fund:

• Step 1 : List your essential monthly expenses: Rent, bills, groceries, loan payments.
  
• Step 2 : Multiply by 3, 6, or 12 months based on your situation. The breakdown is below.

Understand that it is not a hard-and-fast rule. You don't need to save it overnight. Start small, create a separate account for your emergency fund, and automate small payments to go out at an interval of your choice. If possible, increase the amount you put in this fund gradually as your earnings grow.

Where to keep your emergency fund

Having a three-layered structure to store your emergency fund would ideally work the best. This will ensure quick access, security, and growth without locking up your money.

Layer 1: Cash in hand

Keep one month's expenses for urgent, cash-only situations. Keeping cash on hand ensures you're covered for immediate needs — whether it's a medical situation, last-minute travel, or an unexpected expense where digital payments won't work.

Layer 2: Savings accounts and sweep-in deposits

Easy access via ATM/debit card. Sweep-in deposits act like FDs but auto-liquidate when your balance drops below a set threshold — giving you higher interest rates while keeping funds accessible.

Layer 3: Liquid mutual funds

They provide better returns than savings accounts and can be withdrawn within 24 hours for non-urgent emergencies.

Suggested read: Are liquid funds the best choice for parking emergency corpus?

Final takeaway

It's easy to put off building an emergency fund. "I'll start next month." "Do I really need it?" The thing about emergencies is that they're time-sensitive. They come at you without prior warning. Thus the earlier you start saving, the better.

Don't think of it like you're preparing yourself for an inevitable worst. An emergency fund is basically an assurance that yes, you'll be alright, just in case something happens. When life throws the unexpected at you, the last thing you should worry about is money.

This article was originally published on March 07, 2025.