Emergency Fund vs Investment: Which Should You Prioritise First?
One of the main queries asked by people at the very beginning of their financial career is whether one should save for emergencies or start investing immediately. Though both of them are necessary, it is very important to understand the priority of each of them to be able to achieve your financial goal in the future.
Some start investing before saving for emergency situations, and there are those who save for a number of years and do not invest at all. Both ways may lead you to some trouble.
What Is an Emergency Fund?
Emergency funds are basically the money set aside for covering any financial emergency or any unforeseen expenses. Emergency funds are the financial safety net that will ensure that any unforeseen situation does not disturb your financial life or make you borrow from somewhere else.
Some of the scenarios when emergency funds will help are:
- Medical emergencies
- Loss of job or delay in salary
- Vehicle repair expenses
- Home repair expenses
- Any other unforeseen family emergencies
It is important to note here that the emergency fund should always be easily available.
What Is Investing?
Investment is an activity where the funds are invested in financial instruments in order to make the investment grow. Investments are more likely to make your money earn returns instead of making them idle.
Examples of popular investments are:
- Mutual Funds
- Systematic Investment Plan (SIP)
- Stocks
- Bonds
- Fixed Deposits
- Gold
Investments are usually done for long-term financial goals.
How Much Should You Save in an Emergency Fund?
The perfect amount for the emergency fund varies according to one’s lifestyle, salary, and obligations. In general terms, those earning salaries should set aside enough to pay up to three to six months’ worth of living expenses, while independent earners and small business owners might need to have enough money saved for six to twelve months’ expenses owing to the unpredictability of their earnings. The fund must suffice for one’s basic expenses like rent payments or housing loan repayments, payment of utility charges, buying foodstuffs, paying insurance premiums, travel costs, and other obligations.
Where Should You Keep Your Emergency Fund?
It needs to be remembered that an emergency fund will always consider factors like safety, liquidity, and accessibility as opposed to high earnings. Because this is emergency money, it needs to be stored in instruments that allow the person to access it quickly and with no much danger. This includes interest-bearing savings schemes, liquid mutual funds, sweep-in bank accounts, and fixed deposits. It is, however, important not to have this emergency fund in instruments that might fluctuate greatly in value, thus forcing you to make withdrawals when you least expect to. This includes equities.
Common Mistakes to Avoid
There are many things that people do when it comes to finance that could hinder their development. Some of these things include the following:
- Investing without having emergency savings.
- Keeping all of your money in a savings account without investing.
- Using investment for an emergency.
- Not taking into consideration the effects of inflation on your savings.
- Not reviewing your finances.
Benefits of Having Both
Here are some benefits that come along when you combine your emergency fund with an investment approach:
- Enhanced financial security
- Decreased financial stress
- Being better prepared for any unforeseen costs
- The ability to build your wealth consistently
- Financial self-confidence
- Making more headway towards meeting your future financial objectives.
Build a Strong Financial Foundation with AJS Wealth
A successful financial plan begins with the right balance between saving for emergencies and investing for the future. At AJS Wealth, we help you create personalised financial strategies that align with your goals, risk profile, and life stage. If you’re planning to start investing, our guide on How to Choose the Right Mutual Fund can help you make informed decisions.
When you have accumulated enough savings to secure your emergency needs, then you should look at ways of making long-term investments to realise your future financial aspirations. It is at this point that you will need to make investments because of certain future events like buying your dream home, planning for retirement, financing your kid’s education, wealth creation, etc. Early investments allow your money to reap the advantage of compounding and increase in value over time.
