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Written by Haider Saleem
Journalist and Political Analyst | LinkedIn / X
Emergency funds may not be the flashiest part of your portfolio, but it may be the most important.
This article explores how market cycles affect personal finances and how to build a emergency fund from the ground up:
1. Why Emergency Funds Matter in Market Cycles.
2. How Much You Need.
3. Step-by-Step Guide to Building Your Emergency Fund.
4. Where to Store Your Savings.
5. What to Avoid.
6. Emergency Fund vs. Investing.
1. Why Emergency Funds Matter in Market Cycles
Stock markets are inherently cyclical. Periods of economic growth are often followed by contractions – by inflation, interest rate hikes, geopolitical events, or corporate downturns.
An emergency fund serves as your financial buffer during these cycles. Rather than selling shares at a loss or turning to interest-based loans, you can use your emergency savings to manage life’s unexpected costs.
Whether it’s a sudden job loss, a medical bill, or car repairs, your emergency fund absorbs these shocks, helping you avoid reactive decisions during turbulent times.
2. How Much You Need
The rule of thumb recommended by most financial experts – including the FCA in the UK and Islamic finance educators – is to save at least three to six months’ worth of essential expenses
This includes, for example:
Example:
Let’s say your essential monthly costs are $2,500:
- 3-month emergency fund = $7,500
- 6-month emergency fund = $15,000
Needs will vary depending on where you live. For example, a family in the U.S. without universal healthcare may require a larger buffer than a family in the UK or Malaysia.
Even if you can’t save this amount right away, starting small still counts. A 2023 U.S. Federal Reserve report found that 37% of adults couldn’t cover a $400 emergency expense from savings. That reflects a global challenge – and underlines the value of even a $1,000 cushion.
3. Step-by-Step Guide to Building Your Emergency Fund
Step 1: Calculate your essential monthly expenses
Use a spreadsheet or budgeting app to track your fixed and variable expenses over the past three months. Focus on must-haves, not lifestyle extras.
Step 2: Set a realistic initial goal
If $15,000 feels daunting, aim for $1,000 first. Then work toward three months, then six.
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Step 3: Automate your savings
Set up a standing order to automatically transfer a fixed amount to a separate savings account every payday. This removes decision fatigue and builds consistency.
Step 4: Use windfalls wisely
Bonuses, tax refunds, cashback rewards, and unexpected gifts can all go straight into your emergency fund.
Step 5: Cut back with intention
Can you spot any waste or anything to can live without? Reduce non-essential spending – and redirect those savings toward your goal. Even $25 per paycheck can add up over time.
Step 6: Review and top up regularly
If your income or expenses change, revisit your target. Replenish any withdrawals promptly and track your progress through monthly reviews.
4. Where to Store Your Savings
A key point: emergency funds need to be safe and liquid – meaning you can access the money quickly without penalties or losses.
Here are some options (note some of these are not halal and just for illustrative purposes):
| Account Type | Liquidity | Ideal For |
| High-yield savings account | High | Daily access + small interest |
| Money market account | High | Slightly higher returns |
| No-penalty CDs | Medium | Short-term parking (if flexible) |
| Prepaid debit card | Medium | Budgeting, no interest earned |
| Cash at home | High | Last resort; no return, risk loss |
Avoid storing your emergency fund in:
- Stocks
- Mutual funds
- Cryptocurrencies
- Retirement accounts with withdrawal penalties
These lack the liquidity and capital protection required for true emergency readiness.
5. What to Avoid
An emergency fund is not a catch-all pot. Avoid using it for:
Holiday bookings
Routine bills (unless income is disrupted)
Paying off long-term debt (unless it’s urgent)
Impulse purchases or investments
Ask yourself:
“Is this expense unexpected, urgent, and unavoidable?”
If not, it likely doesn’t justify dipping into your fund. Remember: If you can plan for it, it’s not an emergency.
6. Emergency Fund vs. Investing
According to the FCA in the UK, if you’re going to need your money soon, you’re not ready to invest. Why? Because the markets may dip just when you need cash – and selling during a downturn often means locking in losses.
Think of your emergency fund as your financial runway, not your destination. It helps ensure that your investment strategy remains stable, even in times of uncertainty.
Once your fund is fully built, you can explore investment opportunities like:
These can be screened using Musaffa’s halal investment tools.
Disclaimer: The content is for informational purposes only and does not constitute legal, investment or financial advice.
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