Building an emergency fund? Start with less than ₹1,000 — Here's how to calculate your monthly SIP investment

An emergency fund is an important component of long-term financial planning that sets aside money for those unexpected, but urgent situations. It is key to separate your emergency fund from your regular savings and regularly assess and adjust the savings as needed to ensure that no sudden circumstances (such as job loss, sudden car repair, expensive medical bills) can affect your day-to-day finances.

The aim of your emergency fund is to help tide over these situations without the need for loans or borrowings and build enough financial flexibility to face a crisis.

Emergency fund: 3-6-9 rule; how much is enough?

In order to calculate your minimum emergency fund amount, tax experts advise that investors with a stable job start by assessing their expenditure for a period of three to six months. Broadly the 3-6-9 rule prescribes: Three months of expenses if you're single, six months if you have dependents, and nine months if your income is irregular. Further, for those with unstable income (freelancers, paid per project, etc.) or heavier financial responsibilities (medical conditions, dependents, etc.) is the best to up the assessment for a period covering six to 12 months of expenses.

Thus, before calculating your emergency fund — first list all your non-negotiable monthly expenses. This will include the food and groceries expenses, water and electricity bills, home loan, internet bill, EMI(s), insurance premiums, loan repayments, school fees, transportation expenses, and the likes.

This total should then be multiplied in increments of three, six and nine (and then 12 for unstable income earners) to build a slow but steady target for you to achieve a good cushion of savings over the medium term. It is also important to periodically assess the math against your current expenses every few months to ensure that your emergency fund matches latest requirements.

Where to invest your emergency funds?

Clear Tax suggests splitting your investments across liquid and easily accessible options. It noted that 30-40% of the investment should be immediately accessible in instruments such as a savings account or bank fixed deposits (FDs). While 60-70% should be invested in low-risk debt options like liquid or overnight mutual funds for better returns without sacrificing safety. Here's a breakdown:

Monthly SIP for emergency fund

For example, if your monthly spend is ₹25,000, for three, six, nine and 12 months that works out to ₹75,000, ₹1.5 lakh, ₹2.25 lakh, and ₹3 lakh, as emergency fund required, respectively.

Calculated as 12% of your total emergency fund being invested in SIPs (liquid and / or overnight funds), this works out to — ₹9,000 for three months, ₹18,000 for six months, ₹27,000 for nine months, and ₹36,000 for 12 months. Here's how much you would have to invest:

• To build three months emergency fund requires ₹900/month in SIP at 6% rate of interest for a period of one year.
• To build six three months emergency fund requires ₹1,400/month in SIP at 6% rate of interest for a period of one year.
• To build nine months emergency fund requires ₹2,300/month in SIP at 6% rate of interest for a period of one year.
• To build 12 months emergency fund requires ₹3,000/month in SIP at 6% rate of interest for a period of one year.

Notably, you can start small and build in stages regardless of a set amount. Depending on your financial ability, start with ₹100-1,000 each month — the key is to consistent and habitual.

Ideally, when it comes to emergency or rainy-day fund, you should stay away from investing in volatile assets such as penny stocks or risky equities, which can fluctuate significantly in the short term. While they may be high risk-high return options, these are not suitable for emergency purpose.

Disclaimer: This story is for educational purposes only. We advise investors to check with certified experts before making any investment decisions.