Emergency Fund
An emergency fund is a cushion of liquid money — typically 3 to 6 months of your expenses — reserved for the unexpected: a serious repair, a health setback, losing your job. It is the piece that comes before your first investment, and the most underrated of all.
What it is really for
It is not about optimising returns: it is insurance. Its real job is making sure an emergency never forces you to sell your portfolio in the middle of a fall — turning a temporary drawdown into a permanent loss. The emergency fund buys independence between your life and the state of the market: with it, crises pass without touching your investments; without it, the market decides when you sell.
How much you need
| Situation | Reference cushion |
|---|---|
| Very stable income (public sector, large employer) | 3 months of expenses |
| Standard employee | 4–6 months |
| Self-employed or variable income | 6–12 months |
The reference is your expenses, not your income: what it costs to run your life for a month, multiplied by the margin that lets you sleep.
Where to keep it
In risk-free liquidity available within days: an interest-bearing account or a money-market fund. Where not to keep it: in stocks (their volatility is incompatible with "might be needed tomorrow"), in locked deposits, or in any asset that can be worth 30% less exactly when you need it. Earning something is desirable; being available is mandatory. Losing a little to inflation is simply the insurance premium.
The three classic mistakes
- Investing it "in the meantime": if it sits in stocks, it is not an emergency fund — it is part of the portfolio under another name.
- Not refilling it after using it: after the emergency, topping it back up becomes priority number one, ahead of contributions.
- Making it infinite: 18 months of idle expenses for a stable employee is pure opportunity cost — beyond a reasonable cushion, the excess works better inside your asset allocation.
Frequently asked questions
How much should my emergency fund hold?+
Between 3 and 6 months of expenses for most people; closer to 12 if your income is variable. Calculate your real monthly expenses and multiply — and review it when your life changes (children, mortgage, self-employment).
Where do I keep it so it earns something?+
An interest-bearing account or money-market fund: availability within days and minimal risk. The return is secondary — this money does not compete with your portfolio, it competes with the panic of selling at the bottom.
Should I start investing before completing it?+
A reasonable middle ground: secure a minimum first (2–3 months) and then build both in parallel — part of your savings to the cushion, part to the portfolio. What you should not do is invest with zero net: the first crisis will push you out of the market.