The Golden Rules of Emergency Funds
- Never invest it in Equity: Your emergency fund is insurance, not an investment. If you lose your job during a global recession, the stock market will also be down 30%. Never put this money in stocks or mutual funds. Keep it in a Savings Account or a Liquid Fund.
- The "Bare Bones" Budget: Your emergency fund is not meant to sustain your luxury lifestyle. It is meant to pay rent, buy groceries, and keep the lights on. That's why we calculate it based on fixed expenses + 70% of variable expenses (assuming you cut out dining out and shopping).
- How many months? If you are single and in a high-demand tech job, 3 months is enough. If you are the sole earner for a family of 4, you absolutely need a 12-month runway to protect your family from market volatility.