An emergency fund is cash set aside for job loss, medical bills, or major repairs, so you never have to sell investments at a bad time or borrow at high rates to cover a surprise.
Most planners recommend three to six months of essential expenses, held in a high-yield savings account or money market fund where the money is safe and immediately accessible. Anything invested in stocks can be down exactly when you need it.
Build it gradually if you are starting from zero: automate a fixed transfer each payday, and direct windfalls like tax refunds into the fund until it reaches the target. Then, and only then, shift extra cash flow toward investing.
Key takeaways
- Emergency cash prevents forced selling at bad times
- Three to six months of expenses is the common target
- Keep it liquid and safe, not invested in stocks
