The emergency fund: your safety net, outside the portfolio
Before you even think about investing, it's essential to build up an emergency fund: a pool of cash immediately available to cover unexpected costs — a car breakdown, medical bills, a home repair, a temporary loss of income — without having to touch your investments.
- Target: cover 6 to 12 months of total monthly spending
- Start with 1 to 3 months of expenses and build it up gradually
- Keep it in an easy-access savings account or a fixed-term account with no penalties, separate from your main current account
- Don't invest it in equities: it needs to be available even when markets are down
The Cash component in the portfolio: a different role
Once the emergency fund is in place, the Cash component inside the invested portfolio (typically 10 to 40% depending on your profile) serves a different function: it acts as a buffer for rebalancing — you sell equities when they've risen too much, buy with Cash when they fall — and, in the income phase, it's the first source to draw from, letting equities keep working.
💡 Don't confuse the two reserves: the emergency fund sits outside the investment portfolio and covers everyday unexpected costs; the Cash inside the portfolio is a tool for managing risk and liquidity within the investment itself.
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