Emergency Funds: The Unsung Hero Of Wealth Planning

When a 38-year-old school teacher from Pune received a sudden hospital bill for her father’s surgery, she felt her heart sink. Years of careful savings in fixed deposits and recurring deposits suddenly seemed fragile. She had not anticipated such a medical emergency. But there was one saving grace in her emergency fund.

The money she had quietly set aside for unexpected situations covered the entire expense, and she avoided taking a high-interest personal loan. Her health insurance helped cover a portion of the cost, but it was the emergency fund that gave her immediate liquidity and peace of mind.

Across India, unexpected events such as medical emergencies, job disruptions, or urgent home repairs can strike at any time. Without a dedicated safety net, these events can derail years of careful wealth planning.

Why An Emergency Fund Matters

“An emergency fund is the backbone of financial security,” says Sanjiv Bajaj, Joint Chairman and Managing Director of BajajCapital. “It ensures that unforeseen circumstances do not force people to liquidate investments or take on high-cost debt. While insurance can cover specific risks, an emergency fund gives immediate access to cash and flexibility to handle situations that insurance may not cover.”

Experts recommend that an emergency corpus should ideally cover six to twelve months of essential expenses. A recent study by SEBI shows that nearly 60 per cent of Indian households are financially vulnerable to emergencies, highlighting the gap in preparedness. Emergency funds act as a buffer, giving families the confidence to face life’s uncertainties without panic.

Building an emergency fund is not about large sums overnight. It is about consistency and discipline. Starting small, even Rs 2,000–Rs 5,000 per month, can accumulate into a significant corpus over time. The fund should be liquid and easily accessible, parked in savings accounts, liquid mutual funds, or short-term deposits.

Practical Steps To Build Your Safety Net

Calculate your essential expenses: Include rent or mortgage, utilities, groceries, loan repayments, and any recurring medical costs. Multiply by six to twelve months to arrive at a target corpus.

Start small and stay consistent: Automate transfers into a separate account or liquid fund. Even modest contributions grow steadily.

Keep it accessible, not invested for high returns: Avoid locking this money in long-term instruments. Liquidity is key.

Review annually: Reassess your corpus as expenses grow or family situations change. Adjust contributions accordingly.

Bajaj adds, “An emergency fund gives you the freedom to pursue long-term wealth-building without fear. Insurance can cover specific shocks, but the emergency corpus ensures your day-to-day life remains uninterrupted. It acts as a shield, letting you take calculated investment risks while knowing that your basic needs are protected.”

Turning Precaution Into Empowerment

The Pune school teacher’s story illustrates a broader truth: an emergency fund is not just a financial tool; it is a confidence engine. When unexpected expenses arise, it prevents panic, preserves investments, and allows families to focus on recovery rather than financial stress.

The lesson is simple but profound. Wealth planning is not just about growing assets; it is about protecting them. An emergency fund may be the unsung hero, but it is often the most crucial part of financial resilience. Insurance and emergency funds work together: one provides coverage for specific events, the other ensures you have cash when you need it most.