Imagine this.
Someone is of 35. Earning well. He has finally started investing in SIPs, building a stock portfolio, Maybe even explored real estate investments. Life feels sorted.
Then one night—a medical emergency.
His father collapses. ICU admission. Tests. Surgery. Medications. Post-op care.
₹5–8 lakh gone in 10 days.
And then the real shock:
His health insurance has a sub-limit.
Some procedures aren’t covered.
Cashless fails. Reimbursement takes weeks.
He has swipe his credit card. He redeem his mutual funds. He break his FD. He pause his SIPs.
And just like that…
Years of investing – undone in a single emergency.
The Harsh Truth
Most Indians are just one medical bill away from financial ruin.
According to NSSO Data (2018), over 63 million Indians fall into poverty every year due to health expenses.
That’s more than the population of Italy.
Despite rising incomes, 70% of Indian urban investors have no proper emergency fund, relying solely on insurance, loans, or worse—breaking long-term investments meant for retirement or children’s education.
What is an Emergency Fund?
An emergency fund is a cash cushion, typically 3 to 6 months of living expenses, kept in highly liquid and safe instruments, for unplanned but essential expenses like:
- Medical emergencies
- Job loss
- Car/bike repair
- Family crisis
- Legal trouble
- Sudden relocation
It’s not for iPhones, travel, or impulsive investments.
Why Insurance Isn’t Enough
Many Indians confuse insurance with emergency funds. But health insurance:
- Doesn’t always cover everything (sub-limits, exclusions, co-pays)
- May take time for claims/reimbursement
- May deny claims altogether
- Won’t help in job loss, urgent home repairs, etc.
Insurance is backup. Emergency fund is first response.
Ideal Emergency Fund: How Much?
- Salaried (Single Earner): 6 months of expenses
- Dual Income Household: 3–4 months
- Self-Employed: 9–12 months
- With kids/elderly dependents: Add extra buffer
Let’s say your monthly expenses are ₹50,000. You should aim for:
₹50,000 × 6 = ₹3,00,000 as minimum emergency fund
Where to Park It?
Safe, liquid places. No risk. Quick access.
| Instrument | Liquidity | Risk | Return (approx.) |
|---|---|---|---|
| Savings Account | High | Low | 2.5–4% |
| FD (Sweep-in) | Medium | Low | 5–6.5% |
| Liquid Mutual Fund | High | Low | 6–7% |
| Short-term Debt Fund | Medium | Low | 6–7.5% |
| Cash at home | Instant | Risky | 0% |
Rule: Accessibility > Return
Psychology of Investors
Indians love to invest aggressively. But they ignore liquidity.
- All in mutual funds, but zero savings for emergencies
- High-value ULIPs, but no money for parents’ medicine
- Maxed PPF, but nothing for sudden job loss
- SIPs in 4 funds, but EMIs unpaid due to a broken laptop
Fear-Based Financial Trap
“I’ll figure it out when it happens.”
No, you won’t.
During a crisis, you can’t:
- Wait for SIPs to mature
- Wait 3 days for fund redemption
- Break your 5-year PPF without penalty
- Get a personal loan at decent rates
You panic. You swipe credit cards. You break your dreams to fund your emergencies.
That’s how wealth is destroyed.
How It Destroys Long-Term Goals
Let’s say:
- You redeem ₹3L of mutual funds during emergency
- You miss 2 years of SIPs due to EMI load
- You halt retirement investments at age 35
That can reduce your future wealth by ₹20–30L over 15 years (assuming compounding at 12%).
How to Build Your Emergency Fund — Step-by-Step
- Calculate expenses: Include rent, EMI, groceries, insurance, transport.
- Set target: Multiply by 3–6 months.
- Open a separate account: Avoid mixing it with spending.
- Use automation: Monthly ₹5K–₹10K towards a liquid fund or FD.
- Review annually: Update as expenses rise.
- Don’t touch unless it’s a true emergency.
Stop Saying “This Won’t Happen to Me”
COVID taught us that even the most stable lives can collapse overnight.
- Jobs vanished.
- Salaries halved.
- Health costs skyrocketed.
Those who had emergency funds slept better. Others crumbled.
Key Takeaways
- Medical bills or job loss can force you to destroy your investments if no emergency fund exists.
- Health insurance alone isn’t enough—claims delay, co-pays, exclusions are real risks.
- Emergency funds should cover 3–6 months of expenses, depending on your lifestyle and risk.
- Park your fund in safe, liquid assets like liquid funds, sweep-in FDs, or high-interest savings.
- Emergency planning is the foundation of wealth building—don’t skip it.
