How to build up an emergency fund before you start investing.
Updated: Jul 30, 2022
KEYPOINTS:
🔑 Building up sufficient emergency funds is important before starting investing
🔑 Aim to build at least 3-6 months of emergency funds
TOOL:
🛠️: 🚨 Emergency fund builder (Maximizations.com) (download to use)
Why it's important to have some emergency funds saved before you start investing?
As long term investors, we are not expected to sell our stocks to fund our short-term expenses.
Market corrections, on average last up to 1.5-2 years
selling the stocks when their values have decreased will lock in the losses.
hence it is not a wise thing to do so.
How much emergency funds should I have before I start investing?
A good rule of thumb is saving up at least 3 - 6 months of expenses.
Refer to: Dave Ramsey's 7 baby steps
This is a template I have created to help you build & keep track of your pool of emergency funds.
download it & amend it where you see fit.
Do I really need to build up 6 months worth of emergency funds before I start investing?
Personally, I would prioritise on achieving at least 3 months of emergency funds first.
Then from then on, my monthly savings from my income will be split accordingly to both my:
Emergency funds pool
so it will continue to reach the 6 months benchmark.
& investment funds
so I am able to start my investment journey too.
Factors to consider:
If the market is quite overvalued
it will be wiser to hold back your investing
and focus on building your emergency funds to the 6 months mark first.
What should I do during the period when I am saving up for at least 3 months worth of emergency funds?
This will be the best time to start shortlisting companies/ assets you are interested in
and perform your due diligence
so hopefully by the time when you are ready to invest
you would have built up your conviction for the assets of your choice.
