QUESTION: What is an emergency fund?

An emergency fund is a special monetary reserve designed exclusively to protect against unforeseen life situations. Such circumstances include a sudden job loss, a serious illness requiring expensive treatment, or urgent car and housing repairs.

The optimal size of such a reserve should be from three to six months' worth of your expenses—specifically expenses, not income. At the same time, it is important to calculate the amount based on a basic standard of living that will allow you to comfortably get through a difficult period by temporarily giving up luxuries.

You must store this created reserve separately from your main everyday money. Bank savings accounts with interest on the balance and quick withdrawal options, as well as short-term government bonds, are ideal for this. Under no circumstances should you invest your emergency fund in stocks or cryptocurrency, as these instruments are subject to market fluctuations and can lead to capital loss at the most inopportune moment.

Creating an emergency fund should always come first on your list of personal financial priorities. Only after this untouchable reserve is fully formed can you move on to long-term investments, buying securities, and achieving other large-scale financial goals.