Money Basics: Establishing an emergency fund
Those considering becoming an investor are often advised to start by establishing a rainy-day fund.
Life can be unpredictable, and unforeseen events like an MOT failure, medical costs, or unemployment can often require a large, and immediate injection of cash.
Without a readily accessible cash cushion, you may be forced to take on debt or dip into long-term investments to cover these costs.
Setting aside cash to deal with unexpected events is an essential foundation for personal financial planning. Without this, it’s difficult to make progress toward other financial goals, such as paying down debt, building retirement savings, or helping to pay for a child’s education.
Individual risk tolerance varies, but as a rule of thumb, you should aim to hold three to six months of savings as a bare minimum.
Keeping cash reserves closer to 12 months’ worth of spending makes it easier to cover any unexpected expenses without being forced to sell investment assets in haste.
Unemployment can present a huge challenge as it can take several months to find a new job, particularly as companies cut back in times of uncertainty such as created by the coronavirus pandemic, or the energy crisis.
Three to six months is a good starting point, but consider setting aside more if you can.
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