Why I Keep Six Months’ Worth of Emergency Funds

[In-Depth Guide] Balancing Aggressive Investing and Emergency Funds for Financial Success

Introduction

When building wealth through investing, a common question arises: How much emergency fund should I keep?

As investment portfolios grow, many investors begin to wonder:
"Wouldn't it be more efficient to allocate more capital into investments rather than keeping cash?"

While taking on more risk can accelerate short-term gains, it also introduces instability and potential long-term pitfalls.

Through my own investing journey, I’ve come to recognize the crucial importance of maintaining emergency funds and striking the right balance between investing and financial security.

In this article, I’ll dive into:

• The risks of over-investing and neglecting emergency funds
• How to determine the optimal amount of emergency savings
• The role of dividends and income protection insurance in financial planning

By the end, you’ll have a comprehensive investment strategy to ensure long-term stability while maximizing growth.

1. The Risks of Over-Investing: Why You Need Balance

Many investors are tempted to allocate all available funds into investments to maximize returns.

However, failing to maintain a cash buffer can lead to serious consequences when unexpected expenses arise.

Risks of Investing Too Aggressively

For example, if you don’t maintain sufficient cash reserves and an emergency expense occurs (e.g., medical bills, home repairs), you might be forced to sell stocks at a market low—turning a temporary dip into a permanent loss.

Leverage can also be dangerous. During the COVID-19 crash (2020) and the tech stock decline (2022), many investors using margin accounts suffered forced liquidations, wiping out their holdings.

Even dividend income isn’t risk-free—companies can cut dividends during recessions, reducing cash flow for investors relying on them for expenses.

1.1 My Strategy: Diversified Investing with Emergency Funds

Early in my investing journey, I also believed in going all-in to maximize returns. However, experiencing market downturns and unexpected expenses firsthand taught me the importance of risk management.

Now, my portfolio consists of:
✅ 10 individual stocks across different sectors
✅ 6 mutual funds for diversification
✅ 6 months’ worth of emergency savings

I also diversify across key industries to reduce reliance on any single sector:

By maintaining a balanced portfolio and securing emergency funds, I can invest aggressively while staying financially stable.

2. How Much Emergency Fund Do You Actually Need?

Emergency funds exist to cover unexpected financial setbacks without forcing investors to sell assets at a loss.

2.1 Recommended Emergency Fund Levels

When I first started investing, I kept a full year’s worth of emergency funds. However, as my investment portfolio and dividend income grew, I gradually reduced this to six months.

For example, my dividend income increased from $10,000 annually to $190,000 last year, and my total investment assets grew from $1 million to over $3 million. Given this stability, I may reduce my emergency fund further to three months in the future.

2.2 Reviewing Your Emergency Fund Regularly

Emergency savings shouldn’t be a fixed number forever. It’s important to adjust based on income stability and investments.

✔️ If investment income is reliable, you can hold less cash
✔️ If job security is uncertain, maintaining a larger buffer is safer

Ask yourself:
✅ How stable is my current income?
✅ Do I have multiple sources of income (dividends, side businesses)?
✅ Am I prepared for sudden large expenses?

By evaluating these factors, you can customize your emergency fund size to match your financial situation.

3. Why an Emergency Fund is Crucial: Real-World Scenarios

Some investors think, "If I don’t expect major expenses, why keep extra cash?"

But unexpected financial challenges can happen anytime:

3.1 My Experience: How I Handled Two Job Changes

I have changed jobs twice in my career. While I managed to transition without a significant pay cut, I realized how lucky I was.

At the time, I had no certifications to prove my skills, making me less competitive in the job market. This motivated me to pursue professional qualifications to strengthen my financial security.

4. Combining Dividends & Insurance for Stability

Rather than relying solely on an emergency fund, I combine dividends and income protection insurance as additional financial safeguards.

4.1 What is Income Protection Insurance?

Income protection insurance provides monthly payouts in case of disability or death, ensuring financial security for dependents.

I currently have a $10,000 monthly income protection plan, which guarantees financial stability for my family even in worst-case scenarios.

5. How to Balance Emergency Funds & Investing

To determine the right balance, consider:

✅ Your annual expenses – Know how much cash you actually need
✅ Income stability – More stable income = less need for cash reserves
✅ Liquidity of investments – Can you quickly sell assets without major losses?

For example, my current living expenses are around $25,000/month, so I structure my finances like this:

This setup fully covers my expenses, allowing me to invest aggressively while keeping a six-month emergency fund.

6. Conclusion: The Right Balance of Risk & Security

✔️ Emergency funds prevent forced investment liquidations
✔️ Adjust your savings based on income stability and expenses
✔️ Use dividends and insurance to reduce reliance on cash reserves

By maintaining a strategic balance between investing and financial security, you can achieve both high returns and peace of mind.

🔹 Take action today: Evaluate your emergency fund and ensure you’re prepared for the unexpected.