Letter to A Young Investor #7: The One Financial Step You Can’t Skip

Dear Young Investor,

I hope you are doing well, and that the lessons we have covered so far have been helpful in guiding you through the early stages of your investing journey.

In my previous letter, I wrote about the idea of savings—the cornerstone of financial independence and the first step toward building wealth.

In today’s letter, before we get into the heart of the matter, I want to tell you a story about my friend. Let’s call him Sameer.

I have known Sameer since college. He was a bright young man, raised by his mother, and always had a plan for how his life would pan out over the next few years. He was one of the first from our MBA batch to land a job, one he had always wanted, and the kind that makes you feel like you’ve finally stepped into adulthood.

His salary was decent, his confidence was through the roof, and he had big dreams about the future. He started saving money every month from the very first paycheque he received and invested all of that in stocks. He was on the path of building wealth while many of us were still struggling to find real jobs—or so we thought.

Anyway, in the busy-ness of life, I lost touch with Sameer for a few months, and so was pleasantly surprised to get a call from him almost a year after he started his job. I was waiting to hear some good stories about his job and investments, but he started the call on a sombre note.

He mentioned how his life had taken a bad turn a couple of months back, when his mother had fallen seriously ill. The hospital bills had started piling up fast. If that wasn’t enough, he also had a car accident. He was lucky to escape unhurt, but his car was severely damaged and had to be taken to the garage for major repairs. Since this was an old car, Sameer did not have adequate insurance to cover the damage, and so had to pay out of his pocket.

As Sameer was telling me about his struggles, I asked him about his investments that would have helped him in these times. But he told me how the recent market crash had reduced the value of his stock investments by 30%, and that they were not enough to cover his mother’s medical bills and the car repairs. So, he had to borrow some money from his uncle.

This was my first brush with one of the most important legs of a sound personal financial plan: emergency funds—a financial safety net of readily accessible savings set aside to cover emergencies, like unexpected expenses or loss of income.

Sameer apparently had no emergency fund to fall back on, and so he had to sell all his investments at a loss. Plus, he had to borrow money.

Now, as he told his story, that wasn’t the worst part. The worst part was the helplessness he felt, knowing that all his careful plans had been undone by something as inevitable as an emergency.

I don’t tell you this to scare you. I tell you this because I’ve seen what happens when people, even smart, well-meaning ones, skip one of the most important steps in their financial lives: building an emergency fund.

Before you think about compounding wealth or finding the next great investment, you need to create a safety net. It’s not flashy or exciting, but it’s essential.

An emergency fund is like the foundation of a house. Without it, the whole structure can collapse the moment the ground shakes. Life is unpredictable, and that’s not pessimism—that’s reality. Cars break down. People fall ill. Jobs disappear. The question isn’t whether unexpected expenses will come your way, but whether you’ll be prepared when they do. An emergency fund gives you the power to handle these moments without derailing your financial future or losing sleep over how you’ll pay the next bill.

Now, how much should you save as an emergency fund? The answer depends on your circumstances, but a good rule of thumb is six to eight months’ worth of your essential expenses. So, if your monthly household expenses are around Rs 1 lakh, you can aim to have Rs 6-8 lakh in an emergency fund. Think of rent, groceries, school fees, and every other key expense you’d need to keep your life running, even if your income suddenly stopped.

If that sounds daunting, don’t worry. You don’t need to build it overnight. Start small. Save a month’s worth of expenses first, then build from there. The key is to start, even if it’s just a little.

Where should you keep this emergency fund? Somewhere safe and accessible, but not so easily accessible, like a regular savings account, where you might be tempted to dip into it for non-emergencies. In my view, bank fixed deposits and liquid funds that are offered by mutual fund companies are great options.

Resist the urge to invest this money in stocks or mutual funds—it’s not meant to grow, but protect.

The beauty of an emergency fund isn’t just practical. It’s psychological. It gives you peace of mind. You walk a little taller, knowing you’re ready if something unexpected happens. And you know what? That confidence, that peace, will make you a better investor. You’ll take well-thought-out risks because you know you have a cushion to fall back on. You’ll invest for the long term without the fear of needing to sell just because there’s an emergency.

My friend Sameer learned this lesson the hard way. But you don’t have to. You’re just starting out, and you have the chance to build your financial life on a solid foundation. Start small, but start today.

Calculate what your emergency fund should look like and take the first step toward building it. It might not feel as exciting as picking stocks or watching your investments grow, but I promise you, it will be one of the most important decisions you ever make.

I wish you all the best on this exciting journey.

Warm regards,
Vishal

This article is authored by Vishal Khandelwal of safalniveshak.com, an initiative to teach investors how to make simple and wise investment decisions.

Also Read:
Letter to A Young Investor #6: A Powerful Habit That Changes Everything
Letter to A Young Investor #5: You Stand Alone
Letter to A Young Investor #4: The Art of Waiting
Letter to A Young Investor #3: The Quiet Wonder
Letter to A Young Investor #2: The Money Manual
Letter to A Young Investor #1: The Philosophy of Wealth