The First Step - Emergency Fund

The First Step in the Zero To Investing Guide For Beginners

Getting Started

This section of the wiki is meant for people who are beginners to finance and investing. This section aims to get your financial situation in order and, hopefully, make it healthier than it is. This section does NOT aim to teach you each and everything there is to know about investing and finance. We don't want you to get bogged down into details and quit before you get started. We'll assume that you have a savings bank account.

Before we can start talking about investing and finance, we have to answer a basic question that some people might ask:

Why should I invest money?

The simplest answer to this question can be that if you don't invest money, you're effectively losing it each and every year. Yes, even if you don't spend it and simply keep it in your savings account, the "real" value of your money would decrease as time passes because of inflation — gradual increase in prices of goods and services. The rate of inflation in the month of April 2022 was 7.8% and a savings bank account in State Bank of India was offering only 2.75% interest rate returns.

Here's another reason to invest money — to spend it when you need it. Your monthly earnings from your job or your business won't be enough to cover grand expenses like a foreign trip, buying an iPhone, or purchasing a house. You need to plan and save enough money so that you can spend it later when you really need it.

Preparing Yourself For Investing

If you're convinced that you need to invest money, there's a certain mindset that you'll have to adopt if you want to keep investing and not get sidetracked a few months down the line.

Do not save what is left after spending, but spend what is left after saving.

This mindset is absolutely essential if you want discipline in your investing journey. A few months or a few years of investing won't do. No, you have to invest each and every month, without exceptions.

Here's the first thing you should do — come up with an estimate of your average monthly expenses. You can use a smartphone app or a spreadsheet software like Microsoft Excel or LibreOffice Calc to keep track of each and every expense you make for 2-3 months. At the end of those 3 months, if you find that you spend 40% of your monthly salary and are able to live comfortably, you should prepare yourself to invest the remaining 60% of your monthly salary.

In this Zero to Investing Series, we'll go through four steps of investing that will help you and your family live a healthy financial life. Ready? Here's the first step.

Emergency Fund - The First Step

This should be the first step in your investing journey — building an emergency fund. Some people also call it a "war chest" fund and a "rainy day" fund. Remember how we asked you to calculate your monthly expenses? You're going to need that estimate to complete this step.

If you spend approximately ₹20,000 in a month, gather ₹20,000 x 6 = ₹1,20,000 and invest it in a bank fixed deposit. If you don't have 6 times the amount of your monthly expense ready at the moment, go ahead and start a bank recurring deposit and invest whatever you can each month until your recurring deposit has 6 times the amount of your monthly expense. When it does, withdraw that money that invest it in a bank fixed deposit.

It's absolutely essential that you DO NOT break this fixed deposit or withdraw money from it unless you or someone in your family is facing a critical emergency that needs money at a moment's notice. The purpose of an emergency fund is to help you whenever you have to spend a significant amount of money unexpectedly as quickly as possible. It's fair to say that you may not receive a headstart or a warning before you face an emergency. An unexpected road accident, being laid off at work and becoming unemployed, getting stranded somewhere you didn't intend to — all of these situations can come up anytime and you need to have money that can be withdrawn within a few minutes at the most.

If you have a sick family member, an irregular source of income, or if you want to prepare yourself even better, you can keep 12 months or 24 months of your monthly expense in a bank fixed deposit. We recommend keeping an emergency fund for 12 months of your monthly expense.

We also recommend using a bank that is considered as a Domestic Systemically Important Bank (D-SIB) by the Reserve Bank of India. The most recent list of D-SIB banks is mentioned in this link. If you prefer using another bank, you'll have to make sure that it is healthy.

If you've managed to build an emergency fund, congratulations, you've completed the first major step in your investing journey!