When you start earning money, you may want to invest a part of your salary to create wealth. But what happens if you suddenly lose your job, face a medical emergency or have to pay for an unexpected expense?
If all your money is tied up in investments, then arranging cash at short notice can become difficult. This is why building an emergency fund should generally come before investing for long-term goals.
What is emergency fund?
An emergency fund is money you keep aside to deal with unexpected expenses. It is not meant for shopping, holidays or other planned purchases. Instead, it helps you manage situations such as job loss, a medical emergency or urgent home repairs.
For example, suppose your monthly essential expenses are ₹25,000. If you lose your job, you will still need money for rent, groceries, electricity and other bills. But if you have an emergency fund of ₹1.5 lakh, you can cover these expenses for about six months. You would not have to depend entirely on someone else or take a loan.
What is investing?
Investing means putting your money into options such as mutual funds, stocks or fixed deposits. It helps to grow your money in long run but if you need it on urgent basis then you would have no other option than selling your investments at loss.
The money which you have invested grows over time but it may not help you at the moment.
So, an emergency fund gives you money to fall back on when life does not go as planned, while investments help your money grow over time.
When you are starting out, make sure to save for emergencies first and invest for the future next. If your income allows it, you can also build your emergency savings while investing a small amount every month.