An emergency fund can be really helpful for investing. I think can help you invest in the businesses with the most growth potential.
What’s an emergency fund?
An emergency is simply an amount of cash that you’ve set aside to be there in-case you need it in an emergency.
You never know when an emergency is going to come, so that’s exactly why having some cash as insurance is a good idea.
How much cash should you have? Well, each adult and household situation is different. What’s the worst (realistic) thing that could happen? I’d say at least $1,000 is a good minimum. But you might need to replace your car – how much would that be? Or you could lose your main source of income and it could take months to find another. A few months of living expenses for the main breadwinner of a household is a good long term target.
How can it help you invest?
If you’re ‘living on the edge’ with your finances then it might not be a good idea to invest in riskier shares. What happens if you lose your job? – You might feel like you need to invest in safer shares, but that could lead to lower returns over the long term.
Giving yourself strong foundations can help you be a bit more adventurous (but not silly) with investing.
That’s exactly what we’ve done with my household’s finances. Over several years we have steadily built up five or six months of living expenses, which means we can invest confidently into ASX growth shares that we like the look of, such as quality exchange-traded funds (ETFs) that I recently wrote about, including Betashares Global Quality Leaders ETF (ASX: QLTY).
‘Cash is king’ is an interesting phrase to remember. It’s most valuable when other people don’t have it. And it’s very valuable when you need it.
I hope that my household will never have to access the emergency fund and there’s plenty of things you can do to minimise the chance of how bad an emergency is – having relevant insurance, regularly performing maintenance on your car and so on.
The stronger your financial position, the more you can pursue opportunities in the quality ASX growth shares space.
