Don't Panic When a Market Crash Happens! Why You Should Secure an 'Emergency Fund' Before Investing, and How to Create Surplus Funds Without Failure

Hello, this is Ikupapa.

'Isn't it better to put the money I have into investments as soon as possible?'

I completely understand the feeling of wanting to move cash into investments as quickly as possible once you learn about the benefits of investing.

I also used to think that it was more advantageous for asset building to invest money quickly rather than keeping it as cash.

However, the basic rule of investing is to keep a solid emergency fund and invest only with surplus funds that won't affect your daily life.

If you invest money that you need for living expenses, you may be forced to sell your assets at a loss if a market crash coincides with an unexpected expense.

In this article, I will introduce:

• Why an emergency fund is necessary

• How much cash you should keep

• How to determine the surplus funds you can invest

I will share these points while incorporating my own experience with household budget management.

1. Why is it dangerous to invest without an 'emergency fund'?

An emergency fund is cash meant to protect your life and your family's life when 'what-ifs' happen, such as illness, injury, unemployment, or broken home appliances.

It is, so to speak, a cushion to keep in your household budget.

If you don't have this money and invest most of your available funds, two main problems will occur.

① You will be forced to sell at a low price during a market crash

The stock market can be expected to grow in the long run.

On the other hand, it can also drop significantly in a short period.

What happens if you have expenses like illness, moving, or replacing home appliances at a time when your assets have decreased significantly?

If you don't have cash on hand, you will have no choice but to sell your depreciated investment assets to raise money.

Even though you could have waited for a recovery, you end up selling at a low price and locking in your losses.

An emergency fund is not just money set aside for living expenses.

It is also a breakwater that allows you to avoid selling your investment assets during a market crash. as well.

② You become afraid of daily price fluctuations and can no longer continue investing

If you are investing money meant for living expenses, you will feel anxious every time stock prices fall.

'If it keeps going down like this, what will I do about next month's living expenses?'

'Wouldn't it be better to sell now?'

When these feelings become strong, you won't be able to rest at night and will end up checking the market almost every day.

Investing is more likely to lead to results when you use time to your advantage and continue for a long period.

However, if you are investing money needed for living expenses, you cannot afford to wait that long.

Because I keep cash separate from my investment assets, I can think, 'This won't affect my immediate living expenses,' even when the market drops.

If I hadn't set aside an emergency fund, I think I would have been pulled by anxiety every time the market fell, wondering, 'Should I sell or should I hold?'

Keeping cash separate is a mechanism to protect not only your household finances but also your peace of mind.

2. Guidelines for an emergency fund and three ways to divide your money

So, how much cash should you keep as an emergency fund?

As a general guideline, there is the following way of thinking.

• Company employees/civil servants: 6 months to 1 year of living expenses

• Self-employed/freelancers: 1 to 2 years of living expenses

Company employees and civil servants, whose income is relatively stable, have a lower risk of losing their income than the self-employed, so the required amount can be relatively smaller.

On the other hand, since self-employed individuals and freelancers often have fluctuating incomes, it is safer to keep a larger cash reserve.

However, this is just a general guideline.

The amount you need depends on:

• family structure

• mortgage or rent

• provisions for illness or long-term care

• plans for changing jobs or starting a business

• a spouse's income

• monthly fixed costs

and other factors.

Instead of mechanically deciding on 'six months' worth because that's the general rule,' it is important to adjust it to the amount that allows you to continue investing with peace of mind.

Thinking about money in three categories

When I start investing, I think about my money by dividing it into the following three categories.

1. Money to protect: Emergency fund

This is money set aside for illness, unemployment, sudden expenses, and so on.

Keep it in a place where it can be withdrawn immediately, such as a regular bank savings account.

Do not use it for investment products that fluctuate in price.

2. Money to spend: Funds planned for use in the near future

This is money that you might need to use within a few years.

For example,

• Car replacement

• Education expenses

• Housing-related costs

• Travel expenses

• Moving costs

• Preparation for life after retirement

and so on.

Money that will be needed soon should be managed in cash so that it is not affected by market declines.

3. Money to grow: Surplus funds

This is money that you do not plan to use for a long time and whose temporary decrease will not affect your daily life.

You should allocate these funds to index funds such as those tracking global stocks.

Surplus funds are not simply "money left over this month."

They are "money that does not need to be used for a long time" that remains after deducting your emergency fund and money you plan to use in the near future.

By managing these three categories separately, it becomes easier to see how much you can safely allocate to investments.

3. How I create surplus funds

I use keeping my expenditure rate against my net basic income in the 80% range as a guideline for managing my household finances.

First, I grasp my living expenses and fixed costs, and secure a sufficient emergency fund and money I plan to use in the near future in cash.

After that, I have only allocated the remaining funds to index funds as surplus funds.

The order is as follows:

1. Understand your monthly living expenses 2. Determine the target amount for your emergency fund 3. Separate money you plan to use within a few years 4. Allocate only the remaining funds to investments 5. Automate your monthly savings

I used to think that choosing the right product was the most important part of investing.

However, as I continued to build my assets, I realized that what is even more important than product selection is creating a household budget that allows you to avoid stopping your investments midway through.

Because I secured cash and only invested my true surplus funds steadily, I have been able to continue managing my investments without worrying about living expenses, even when the market drops.

Through that accumulation, I have now grown my financial assets to the scale of tens of millions of yen.

However, this is not the result of investing a large amount of money all at once.

It is the result of organizing my household finances and continuing to invest within a reasonable range.

Because I have secured an emergency fund, even when the market drops significantly, I can think:

'My living expenses are separate'

'There is no need to sell right now'

I can make calm decisions like these.

This sense of security is what supports me in continuing to invest for a long time.

4. It was also cash on hand that supports freedom after retirement

I am thinking about how I will work after retirement, living in multiple locations, and taking on the challenge of new learning.

In that case, having a large amount of investment assets is not enough.

I also need cash to cover the preparation period before starting a new job and to handle unexpected expenses.

Grow investment assets over the long term.

Secure money for living and taking on challenges in cash.

Because this division of roles is in place, I can think about my future options without feeling rushed.

An emergency fund is not just 'money set aside for when you are in trouble'.

It is also the breathing room needed to take steps toward new things, such as changing jobs, becoming independent, retraining, or relocating.

For me, the peace of mind that cash on hand provides is a valuable asset that supports my free time and choices.

Summary | Check Your Emergency Fund Starting Today

What you need to achieve results in investing is not just special investment techniques.

It is about creating a household budget that allows you to continue investing without stopping, even when the market drops.

To that end, think about your money by dividing it into the following three categories.

1.Money to protect: Emergency fund
2.Money to spend: Funds planned for use within a few years
3.Money to grow: Surplus funds not needed for a long time

With the foundation of an emergency fund, you won't panic and sell when a crash occurs, making it easier to continue long-term investing.

Thank you for reading until the end.

To proceed with investing with peace of mind, please first check the following three things.

• Calculate your household's monthly living expenses

• Write down your target emergency fund amount that suits your work style in a notebook

• Subtract your emergency fund and planned expenses from your current cash to confirm your true surplus funds

There is no need to increase your investment amount suddenly.

The first step is not to look for investment products, but to know your own living expenses.

I, too, will continue to steadily organize my household budget and assets toward future independence and a free life while continuing my studies for the Bookkeeping Level 3 exam.

While solidifying the foundation of your life, let's continue to work through our to-do lists for today calmly and in good spirits.