First of all, what is an emergency fund?
Put simply, an emergency fund is a stash of money that you can easily access at all times.
How much should an emergency fund be?
The general rule of thumb is 3–6 months worth of your expenses. Generally, $20,000 is a good number for an everyday investor, but at the end of the day, what you're comfortable with matters the most.
But what is the use of keeping an emergency fund?
1. It keeps you afloat during emergencies
This is basic and self-explanatory, and there's nothing much to explain here.
If you have an emergency fund, you'd be able to use it to cover emergencies such as a sudden job loss, an unpredicted house repair, medical mishaps, and other unplanned but necessary expenses.
Let's move on and see the benefits of having an emergency fund beyond emergencies.
2. It keeps your investment stable
Earlier, we touched on why you should forget about investing if you don't have an emergency fund. The reason why is simple:
The stock market goes up and down. If you keep most or all of your spare money in your investment account, you're going to worry excessively about how your investment is doing.
What's the point of investing if you can't sleep?
By having an emergency fund that isn't affected by the stock market, you'll be able to leave your investment alone and let it grow for the longer-term.
To understand more about this, here's a post you can check out:
3. You can prove you have money when you need to
Sometimes other people, companies, and organizations want proof that you have money. You may want to show this proof so that you can:
- Apply for a visa to visit another country
- Get a house mortgage
- Apply to rent a house in a competitive market
- Get a car loan financing
- and more
In most of the above examples, you need to provide several months' worth of bank statements as proof of your finances. Your investment accounts are irrelevant. So if you have an emergency fund, it can double as proof of finances that you can use whenever you need to.
Where should you keep an emergency fund?
An emergency fund is not an emergency fund if you have to jump through hoops to access it.
An emergency fund should be kept somewhere that is easily accessible at all times, so this could be a chequing or savings account, preferably high-interest ones.