An emergency fund is very important as it is a pot of money to fall back on should you either find that your income reduces, such as losing your job, or if you have to pay for something unexpected, such as having to replace your boiler.
A good rule of thumb for the size of your emergency fund is between 6 and 12 months’ essential and lifestyle expenditure. However, once you get to this stage, see if you can get to 12 months’ income to provide you with a great safety net for the future!
Emergency Funds and Investing
It is heavily recommended that you establish a sufficient emergency fund before you start investing money into funds that can fall as well as rise in value. Whereas these investments offer greater long-term growth potential than cash savings, their value can significantly fall in a very short period of time. Should that be the time that you need to access your investment, you could end up losing more value than you need to. An emergency fund protects your investment against that risk, as you could utilise your emergency fund, rather than sell you investment at a loss.