The first step before investing: build an emergency fund
Before you start investing in the capital market, it is important to build an emergency fund that will protect you if an unexpected expense arises or your income falls. On this page, we will see how much money you should keep aside, where it is best to hold it, and why a liquid, stable fund lets you invest for the long term without being forced to sell at the wrong time.
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Before choosing your first stock or fund, you must make sure you have a financial safety net for emergencies. Without such a fund, even the best investment can become a trap if you are forced to sell it at the worst possible time.
What is an emergency fund?
An emergency fund is a sum of fully liquid money set aside exclusively for unexpected situations that carry an immediate price tag:
- A sudden job loss or a drastic drop in income.
- An urgent and unexpected medical expense.
- A major and expensive car or home repair.
Why does every investor need an emergency fund?
The capital market is volatile. Investments are made for the medium and long term so that your money has time to grow and recover from declines.
How much money should you put in an emergency fund?
Months of living expenses
The commonly accepted financial guideline is measured in months of living expenses — the amount you actually spend each month on rent or a mortgageA long-term loan for purchasing a property, with the property serving as collateral for the bank., food, bills, and so on:
How much should you keep?
- Employees with stable income: 3 to 6 months of expenses.
- Families with high expenses: 4 to 8 months of expenses.
- Self-employed people or anyone with variable income: 6 to 12 months of expenses, because of the inherent uncertainty in their income.
This money must follow three strict rules: it should be accessible, stable, and liquid. The goal here is to preserve its value and ensure immediate availability, not to maximize returns.
It is advisable to keep the money intended for your emergency fund in a low-risk savings product. You can find more details in the section about low-risk investment and savings.
Frequently asked questions
Should I use my emergency fund to "buy the dip" in the stock market when an opportunity arises?
No. This is one of the most common mistakes. It is easy to be tempted to invest your emergency fund when the market looks attractive, but remember: capital-market crises often arrive alongside an economic recession, layoffs, or cutbacks. If you invest the fund, the market keeps falling, and you lose your job at the same time, you will be left exposed on both fronts.
Doesn't money kept in a money market fund or checking account "miss out" on stock-market gains?
It does not earn as much as the stock market, and that is perfectly fine. Every shekel (שקל) in your financial plan has a role. The role of money in the stock market is to grow. The role of the emergency fund is to protect. The "opportunity cost" of money that is standing still is, in effect, the insurance premium you pay for your peace of mind.
Is it better to lock the emergency fund in a one-year bank deposit?
A one-year deposit undermines one of the most important principles of an emergency fund: immediate liquidity. If your car breaks down or a medical emergency arises tomorrow morning, you cannot wait eight months for the deposit to open. If you choose a deposit, make sure it has weekly or monthly exit points, or consider a money market fund that offers daily liquidity.
In summary
An emergency fund is your financial seat belt. It should coverA contract under which an insurance company undertakes to compensate the insured in the event of damage in exchange for a periodic payment. 3 to 12 months of expenses, depending on whether you are an employee or self-employed, and it is best kept in a liquid, low-risk product such as a money market fundA mutual fund that invests in low-risk, short-term assets and serves as a liquid alternative to a bank deposit. or flexible deposit. Only after this safety net is in place and protecting you from life's surprises are you mentally and financially ready to begin investing in the capital market for the long term.