The emergency fund and SIP plan that survives a bad year

Take three months of bank and card statements and add up what actually left the account — rent or EMI, groceries, utilities, school fees, insurance premiums, transport, medical, help and the irregular annual bills divided by twelve. That figure, not your salary, is what the fund is measured against.

An emergency fund has one job: be available on a bad day at a predictable value. Split it in three parts — about one month in the savings account, one to two months in a sweep-in fixed deposit, and the rest in a liquid or ultra short duration fund redeemable within a working day.

Do not park it in equity, in a five year tax-saving instrument, in the same account you spend from, or in a relative business. And keep it separate from the account your card autopays from, or it will quietly disappear.

A single hospital admission can undo four years of SIPs. Before increasing investments, confirm two covers exist: a family floater health policy sized for private hospital costs in your city, independent of employer cover, and pure term life insurance if anyone depends on your income.

Term cover of roughly ten to fifteen times annual income, running to the year your dependants become independent, is the usual starting point. Buy term insurance as protection only — bundled investment-linked policies serve neither purpose well.

Only now commit monthly investments. Take monthly income, subtract fixed obligations, subtract the buffer top-up until the fund is full, subtract insurance premiums. Invest a fixed share of the remainder and let the rest be spent without guilt.

Attach every SIP to a named goal with a date. A goal five years away or nearer belongs mostly in debt; ten years and beyond can carry equity. The naming matters because it decides what you do when markets fall — an unnamed SIP gets stopped, a goal-linked one gets defended.

• Step the SIP up with each increment, ideally automatically, rather than promising to review it.
• Keep the number of funds small. Four well-chosen funds are easier to hold through a downturn than eleven.
• Set the debit date for the day after salary credit.

Write down a target allocation between equity and debt, then review it once a year on a fixed date and restore the target if it has drifted more than five percentage points. That is the whole rule.

Rebalancing forces the correct behaviour mechanically: it sells what has run and buys what has lagged, without asking you to form a view. Note that a rebalance is a redemption, so check the tax and exit load implications before executing, and prefer to rebalance using new contributions where possible.

Assume, at some point, a job loss with three months to the next role, a market down 30 per cent, and a medical bill. A household with a full buffer, health cover and goal-linked SIPs pauses contributions for two months, spends from the buffer, keeps the portfolio invested and rebuilds the fund when income resumes.

A household without the buffer redeems equity at the bottom, breaks a deposit, and takes eighteen months to recover ground. The difference between those two outcomes was decided years earlier, by the order in which things were built.