Emergency Fund

An emergency fund is money set aside for the unexpected — job loss, medical bills, a large repair. It exists for expenses that arrive without warning, and both its purpose and where you keep it differ from investment money.

The usual target is three to six months of living costs. Three is enough with a stable salary; six or more suits freelancers and the self-employed, whose income fluctuates. Spending 2,500 a month points to a 7,500 to 15,000 fund.

What matters is access, not return. Keep it in an instant-access account or a short deposit. Held in stocks or funds, it forces you to sell at a loss precisely when you need it most.

An emergency fund also improves your investing, because it stops you from selling at the bottom to raise cash. That is why the advice to build one before you start investing keeps coming up. Rebuilding the fund after using it matters more than building it the first time. Left unreplenished, the next emergency goes on credit instead.