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GeorgeRising Star ⭐️
Software Developer in Edinburgh
Asked a question 4 months ago

What are your thoughts on the level of cash to hold before investing? Most of the material on the internet suggests keeping 3-6 months living expenses or salary as an emergency fund. I can't help thinking that's too much. What kind of emergencies would you need to spend six months' salary on?

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Hi George, I think the answer to your question largely depends on your circumstance. Firstly, depending on your monthly income and expenses, saving 3-6 months' expenses or salary, maybe too much or too little. Secondly, I think this also depends on the type of emergencies. For example, so many people have lost their jobs due to COVID-19. No one could have predicted that just a few months ago. In severe emergencies such as job losses, having a six-month cash buffer gives you time to get a new job without liquidating your investments. Imagine that you had only one month's salary saved, and you lost your job due to the pandemic. One month's salary wouldn't be sufficient to keep even the most frugal people going till they secure another job.

My recommendation is to save what makes you comfortable. You alone know how much you earn and how much you spend monthly. Think about all possible emergencies that you might encounter - pick one of them, calculate the costs, add a little extra, and set that amount as your emergency fund goal. That's how I calculate my emergency fund. Please note that I am by no means a financial expert.

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