How much should I keep aside before I start investing?
Three to six months of expenses, not of salary: enough to get through a setback without having to sell your investments at the worst possible moment. Skipping this doesn't risk lower returns — it risks being forced to sell at a loss precisely when markets are down.
Work it out on spending, not income
Take what actually leaves your account in an average month: rent or mortgage, bills, food, transport, insurance, instalments. It is a lower number than your salary, and it is the one that matters: in a hard stretch, that is what you have to cover.
Three months is enough with a stable job and nobody depending on you. Six or more if your income varies, if you are the only earner, or if you work somewhere that takes time to find another job.
Why skipping it costs more than it looks
Without a buffer, the first setback — a car to repair, three months without work, a medical bill — forces you to withdraw from your investments. And setbacks have an ugly habit of arriving during recessions: exactly when markets are lowest.
So a loss that would have been temporary becomes permanent, and not because you picked the wrong investment: because there was no reserve. It is the single costliest mistake in personal finance, and it has nothing to do with what you bought.
Where to keep it, and why it shouldn't earn much
It must be available within days and must not be able to lose value: a current account, an instant-access savings account, or the equivalent. Not shares, not long bonds, nothing that could be worth less on the day you need it.
It will earn very little, and that is fine: it is not an investment, it is insurance. Its return is the freedom not to touch anything else — and that freedom is worth more than any percentage point.
In short
- Three to six months of expenses, not of salary.
- Six or more if your income varies or you are the only earner.
- Its job is to stop you being forced to sell when markets are down.
- Keep it where it cannot lose value: it is insurance, not an investment.
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