Emergency Fund

Life brings surprise costs. Without an emergency fund, people often have to borrow on a credit card or take an expensive loan to cover them, which can start a cycle of debt. An emergency fund lets you pay the cost and carry on.

A common guideline is to hold enough to cover three to six months of essential expenses. If your essentials, such as rent, food, bills, transport and minimum debt payments, total 2,000 a month, that suggests a fund of 6,000 to 12,000. People with unstable income, such as freelancers, or those who support a family often aim for more.

The fund should be safe and easy to reach quickly, so it is usually kept in a savings account rather than invested in shares, whose value can fall at exactly the wrong time. It should also be separate from everyday spending money, so it is not used by accident.

Building an emergency fund usually comes before investing for long-term goals. Once it is in place, other savings can be invested with less risk of being forced to sell at a bad time.