-4. Importance of an Emergency Fund
Many new investors do the mistake of treating their investments as their emergency fund. This can be a bad ploy since emergencies usually arrive unannounced and if you dip into your investments, then achieving your financial objectives can get difficult.
Life is unpredictable. Hence, situations like a sudden job loss or accident or unexpected bills can put a strain on your finances. If you don’t have an emergency fund, then you will be left with no choice but to break your investments or get a loan. Under either circumstance, it can put an undue strain on your finances.
To determine the size of the emergency fund, it is important to assess your minimum monthly expenses and be prepared for at least 6-12 months of costs if your income stops. While there is no rule around this, most people find it comforting to have an emergency fund of the size of a six-month essential monthly expense.