Everyone needs an emergency fund. As it says on the tin, this is the money that you can call on in an emergency.
Building such a fund should be the first thing that you do when it comes to financial planning, let’s call it financial base camp.
Where to keep it?
You need to keep your emergency fund on deposit in the bank. I know this means that your return on this money will be negligible. However by doing so, you can be certain that the money will be there when you need it and you won’t run the risk of having less than you originally invested.
The alternative would be to have the money invested in assets, i.e. stocks, bonds, etc. The problem with this is that assets can go down in value as well as up. Not only that, but they tend to have an irritating habit of falling in value right before we actually have an emergency and need the money.
My rule of thumb is that an emergency fund should equate to six month’s worth of your salary. Therefore, if you did lose your job, you would have half a year to find something new. Much more than this amount and you risk having too much money that is lying idle.