Regardless of how you allocate your investment portfolio, most experts agree that it's essential to keep a certain amount of cash on hand for emergencies. Most financial advisers encourage people to set aside three to six months' worth of income in a readily accessible, highly
liquid
account, such as a money market account or fund. You can tap into your rainy day fund when you have unforeseeable expenses, whether that's the cost of a new transmission for your car or emergency medical expenses for yourself or a member of your family.
Other experts recommend keeping a portion of your emergency fund in a balanced portfolio of stocks, bonds, and mutual funds, rather than solely in cash equivalents. They argue that you risk losing too much buying power to inflation if you have all of your emergency fund in cash equivalents. And they point out that you may be able to charge the costs to a credit card until a short-term investment matures or the market goes up. However, if you need all of the money on short notice, you might have to sell at a loss.
