Emergency fund

An emergency fund is money kept somewhere safe and quickly accessible, such as an instant-access savings account or, for some people, a money market fund, rather than in shares or long-term bonds. Its job is not to grow but to be there, at full value, when something goes wrong: a job loss, a broken boiler, a medical bill or a car repair. A common rule of thumb is to hold three to six months of essential spending, with more for people whose income is irregular, who are self-employed or who support dependants.

The fund matters to an investor because it protects the investment plan. Without one, an unexpected bill can force you to sell shares after a market fall, locking in losses, or to borrow on a credit card at a high interest rate. The trade-off is that cash usually earns little more than inflation, and sometimes less, so holding far more than you need has a cost. A common misunderstanding is to count investments or unused credit as the emergency fund; both can shrink or disappear exactly when they are needed.