Is there a good rule of thumb for how much I should have set aside as emergency cash?
If you are still paying off debt, then you should have about $1000 in savings and put all you can towards non-mortgage debt. If you don't have any debt besides your mortgage, then add up all of your monthly expenses including food, gas, utilities and keep 3-6 months in liquid savings. Whether you keep 3 or 6 months depends on how safe your income is. If you have a steady safe job, you might be safe with 3 months. But, if your employer is cutting back or you are in a commission based job or self employed - then lean more towards 6 months expenses. Congrats on your new home! We aim to keep 6 months of expenses. The rationale is that its enough time to recover from most serious illnesses (that you can recover from) or a redundancy or pay for a large unexpected problem not covered by the insurance (e.g. the boiler dying). It also gives us enough time to reorganise finances if needed. For example we could get out of contracts (like mobile phones, sky TV), sell the car, and maybe even find a cheaper house if needed in that time. It will take a good chunk of time to build up that amount and it's worth considering how many commitments you have (kids, wife, mortgage, car...) as the fewer you have the less you need. If you have fewer commitments you can be comfortable with much less contingency. When I lived in rented accomodation and didn't run a car or have many possessions, I just maintained enough cash to cover my bills for about 6 weeks, this would give me enough time to find another job, and if I didn't get one I could always crash round a friend's house. "While I certainly agree with the principle of paying down debt, there is some value in having a healthy cash cushion.  If an emergency expense were to come up, and your credit has been cut-off or reduced to the point where you have no excess credit, then having real cash on hand is critical. I would perform the following thought-experiment:  What if my available credit had been cut off?  How much would I need in cash to survive for 1 month, 3 months, 5 months, etc.?  Consider what time period you'd be comfortable with, and set that amount as your minimum desired cash on hand. While it may seem extreme to not have access to credit at all, during the credit crisis many banks and lenders ""tightened"" their lending: reducing credit limits, closing lines of credit, calling loans, raising rates, etc. Suze Orman recommends cash savings equivalent to 8 months living expenses. That doesn't mean 8 months salary, but 8 months of what it would take to live on.  At one point, in the midst of the economic crisis, I thought that made sense. The Simple Dollar blog considers Suze's recommendation and the idea of emergency fund vs. debt repayment.  Worth reading: Is Suze Right? Do Emergency Funds Now Trump Debt Repayment?." I think this varies considerably depending on your situation.  I've heard people say 6 month's living expenses, and I know Suze Orman recommended bumping that to 8 months in our current economy. My husband and I have no children, lots of student loan debts, but we pay off our credit cards in full each month and are working to save up for a house.  We've talked through a few different what-if scenarios.  If one of us were to lose our job, we have savings to cover the difference between our reduced income and paying the bills for 6 or 8 months while the other person regained employment.  If both of us were to lose our jobs simultaneously, our savings wouldn't hold us over for more than 3 or 4 months, but if that were to happen, we would likely take advantage of the opportunity to relocate closer to our families, and possibly even move in to my parent's house for a short time.  With no children and no mortgage, our commitments are few, so I don't feel the need to have a very large emergency cash fund, especially with student loans to pay off. Think through a few scenarios for your life and see what you would need.  Take into consideration expenses to break a rental lease, cell phone contract, or other commitments.  Then, start saving toward your goal. Also see answers to a similar question here. "Since it's not tagged united-states, I'd like to offer a more general advice. Your emergency fund should match the financial risks that are relevant to you. The two main classes of financial risk are of course a sudden increase in costs or a decrease in income. You'd have to address both independently. First, loss of income. For most, this would simply equate to the loss of a job. How much benefits would you expect to get, and for how long? This is often the most important question; the 6 months advise in the US is based on a lack of benefits.  With two incomes, you're less likely to lose both jobs at the same time. That's a general advise, though. If you both work for the same employer, the risk of losing two jobs at the same time is certainly real. Also, in countries with little protection against dismissal (such as the US), the chance of being layed off at the same time is also higher. On the debit side, there are also two main risks. The first is the loss or failure of an essential possession, i.e. one which requires immediate replacement. This could include a car, or a washing machine. You already paid for one before, so you should have a good idea how much it costs. The second expenditure risk is health-related costs. Those can suddenly crop up, but often you have some kind of insurance. If not, you'd need to account for some costs, but it's hard to come up with an objective number here. The two categories are dependent, of course. Health-related costs may very well coincide with a loss of income, especially if you're self-employed. Now, once you've figured out what the risks are, it's time to figure out how to insure against them. Insurance might be a better choice than an emergency fund, especially for the health costs. You might even discover that you don't need an emergency fund at all. In large parts of Europe, you could establish a credit margin that's not easily revoked (i.e. overdraft agreements), and unemployment benefits are sufficient to cover your regular cost of living. The main risk would then be a sudden lack of liquidity if your employer goes bankrupt and fails to pay the monthly wages, which means your credit should be guaranteed sufficient to borrow one month of expenses. (This of course assumes quite good credit; ""pay off my car"" doesn't suggest that.)" How to start is pretty simple.   With your next pay check set aside an amount and open a separate savings account.  Since this is an emergency fund - you want it someplace where you can get to the money quickly (so a CD or mutual fund is not good), but you want it in a separate account so that you don't accidentally use it.    Once the account is opened I'd recommend setting up an automatic transfer, or make it part of the direct deposit if you do that, so that you put in some money regularly (every pay check).  By adding to it regularly and not using it, you'll more quickly achieve your goal.   I'd recommend stopping, or slowing any retirement savings or other investing, until you get the emergency fund in place.  If you have an emergency, the money in the retirement fund isn't going to do you much good as it costs too much to do an early withdrawal.  The whole point of the emergency fund is to have liquidity when you need it so that you don't incur the costs of unplugging your longer term investments. Also don't worry overly much about making money on this money.  This isn't an investment it is there for emergencies. I think that Dave Ramsey has a good approach to emergency funds. Save $1,000 that is immediately accessible in an emergency, pay off your debts, then build a 3-6 month fund. Two years is great, but takes a really long time to build up. 6 to 9 months worth of expenses is recommended. You should also consider having long-term disability insurance in place, in case of serious illness or accident. "Between 6 months and a year is normally regarded as the ""standard"".  Plan out what your monthly expenses are and save that money away.  One thing to consider is what extras can you give up.  If you are currently eating steak and lobster every day can you live with switching to ramen noodles for a period of time?  Can you switch from premium cable to basic cable (or cancel it altogether)?  Questions like this can greatly impact the amount you have to set aside. I personally have my emergency fund in CDs that mature the first of every month.  I know there is less liquidity in this approach but I'm ok with that.  My emergency fund is a sum of cash I'll always have so I wanted to reap the benefits of a higher yield.  If it comes down to it I can place an expense on a credit card and pay off the credit card when funds become available." The bare minimum should be 6-months of expenses.  Ideally, it should be at least 1 year.  My personal preference is 2+ years, but one thing at a time. Figure out your necessary expenses: food, shelter, transportation and necessary extras.  An example of a necessity, beyond the basics, for me is a decent internet connection.  Telephone costs is another good example.  (Meanwhile, electricity and such bills should be included in the figure for shelter.) You may want to include some allowance for clothing as well; especially for the 2+ year plan. The main factor should be what sorts of emergencies you are trying and also need to protect yourself against. Overall I'd say at least 6-9 months of expenses, adjusted for the above factors. More might be better but I'd probably keep that in a different type of investment vehicle, mainly because it doesn't really need to be accessible instantaneously like your normal emergency fund would need to be. First you should maintain a monthly expense and find out the burn rate. There would be certain expenses that are annual but mandatory [School fees, Insurance Premium, Property Taxes, etc]. So the ideal emergency fund depending on your industry should be 3 month to 6 months plus your mandatory yearly payments, more so if they come together. For example Most of my annual payments come out in May and I bank on the Bonus payout in April to cater to this spike in expense. So if I were to lose a job in March, my emergency funds would be sufficient for routine expenses, if i don't provision for additional funds Second you need to also figure out the reduced rate of monthly burn and ideally the emergency funds should be for 3 months of normal burn and 6 months of reduced burn. Many, many good answers here, but I like this one:  One month's worth of expenses for each full percentage of unemployment.  Therefore, it would normally float between, say five months and ten months.  When the economy's hoppin' -- you have less to worry about.  When times are tough -- beef up that fund.
Intellectually and logically, it shouldn't bother me for a second to charge something for a buck.  It's a losing proposition for the merchant, but their immediate business costs should be of little concern to me.  (They're making a choice to sell that item to me at that price and by accepting that means of payment, right?)  but the more I charge as opposed to paying cash, the more cash back I get. In my old-ish age, I've gotten a little softer and will pay cash more often for smaller amounts because I understand the business costs, but it's not a matter of caring what other people think. Accepting credit cards, or not, is a business decision.  It's usually a good one.  But with that decision come the rules, which up until about a year ago, meant that merchants couldn't set a minimum charge amount.  Now that's not the case; merchant account providers can no longer demand that their merchant clients accept all charges, though they are allowed to set a minimum amount that is no lower than $10.00. In the end, it's a matter of how much you're willing to pay in order to influence people's thinking of you, because the business/financial benefits of doing one or the other are pretty clear. A common rule of thumb is the 28/36 ratio. It's described here. In your case, with a gross (?) salary of £50,000, that means that you should spend no more than 28% of it, or £1,167 per month on housing. You may be able to swing a bit more because you have no debts and a modest amount in your savings. The 36% part comes in as the amount you can spend servicing all your debt, including mortgage. In your case, based on a gross (?) salary of £50,000, that'd be £1,500 per month. Again, that is to cover your housing costs and any additional debt you are servicing. So, you need to figure out how much you could bring in through rent to make up the rest. As at least one other person has commented, the rule of thumb is that your mortgage should be no more than 2.5 - 3 times your income. I personally think you are not a good candidate for a mortgage of the size you are discussing. That said, I no longer live in England. If you could feel fairly secure getting someone to pay you enough in rent to bring down your total mortgage and loan repayment amounts to £1,500 or so a month, you may want to consider it. Remember, though, that it may not always be easy to find renters. Couple of points about being a consultant in the US: It sounds like the rules for what you can deduct may be more lax in Italy.  For example, you can deduct a certain percentage of your home for work but the rules are relatively strict on your use of that space and how much is deductible.  Also things like clothes, restaurants, phones, car use, etc must follow IRS guidelines to be deductible.  This often means they are used exclusively for work and are required for work.  A meal you eat by yourself is not generally deductible, for example.  Any expense you would have had anyway if you were not working is generally not deductible. A contractor in the US can organize in various ways, including sole proprietorship, an S-corp, and a C-corp.  Each has different tax and regulatory implications.  In the simple case of a sole proprietorship, one must pay not only regular income tax but also self-employment tax, which is the part of social security and medicare tax normally paid for by one's employer.  Estimated taxes must be paid to the government quarterly and then the actual amount due synced up at the end of the year (with the government sending you the difference or vice versa). Generally speaking contractors may set aside more money pre-tax for retirement and have better investment options.  This is because solo 401(k) retirement accounts are cost-effective and flexible and the contractor can set aside the full $18K pre-tax as well as having the company contribute generously (pre-tax) to the retirement account.  Contractors can also easily employ spouses and set aside even more. The details of how frequently you are paid as a contractor and how much notice (if any) the company must give you before terminating your relationship are negotiated between you and the company and are generally pretty flexible.  You could get paid your whole year salary in a lump sum if you wanted.  The company that is paying you will not normally give you any benefits whatsoever...in this way it is the same situation as it is in Italy. By the way the three points you mention in your edit are definitely not true in the US. First priority is to set up an emergency fund of 6 months expenses. If you're going to be making ~30k a year, then that means you'll probably want to put away about 10k of it in a savings account or something else similarly liquid.  After that, paying off your student loans probably makes the most sense depending on the rate. My general rule of thumb (and I'm sure others will disagree with me) is to pay off debts that are >=6.0% first before investing. Paying off debt is a risk-free return on your money, which makes it pretty valuable. It'll let you direct more of your monthly income into retirement savings, too. After that, open up a Roth IRA.  You can put a maximum of $5500 in it for this year.  I like Betterment, but Wealthfront has a similar service. "First off, you generally want to park your emergency fund somewhere that is ""safe"", meaning something that is not subject to market fluctuations.  Your emergency fund is something you need to be able to count on when times are tough!  That rules out things like stock market investments. Secondly, you need to think about how quickly you will need access to the money.  If you have an emergency, odds are you don't want to be waiting around for weeks/months/years for the money to become available.  This rules out most fixed-term investments (Bonds, traditional CDs, etc). If you are concerned that you will need near-instant access to your emergency money, then you probably want to keep it in a Savings or Money Market Account at the same bank as your checking account.  Most banks will let you transfer money between local accounts instantly. Unfortunately, your local bank probably has pitiful interest rates for the Savings/MMA, far below the inflation rate.  This means your money will slowly lose value over time.  Be prepared to keep contributing to it! For most people, being able to draw the cash from your fund within a few days (<1 week) is sufficient.  Worst case, you charge something on your credit card, and then pay down the card when the emergency fund withdrawal arrives. If ""money within a few days"" is okay for you, there are a few options: Money Market (Mutual) Funds (not to be confused with a Money Market Account) - This is the traditional place to keep an emergency fund.  These are investment funds you can buy with a brokerage account.  An example of such a fund would be Fidelity Cash Reserves.  MMFs are not FDIC insured, so they are not exactly zero risk.  However, they are considered extremely safe.  They almost never go down in value (only a few times in the past few decades), and when they have, the fund manager or the Federal Govt stepped in to restore the value.  They usually offer slightly better return than a local savings account, and are available in taxable and non-taxable varieties. Online High-Yield Savings or Money Market Account - These are a relatively new invention.  It's basically a the same thing as what your local bank offers, but it's online-only.  No local branch means low overhead, so they offer higher interest rates (2.0% vs 0.5% for your local bank).  Some of them used to be over 5% before the economy tanked.  Like your local bank, it is FDIC insured. One bit of caution:  Some of these accounts have become ""gimmicky"" lately.  They have started to do things like promo rates for a few months, only offering the high interest rate on the first few $K deposited, limiting the amount that can be withdrawn, etc.  Be sure to read the details before you open an account! No-Penalty CDs - Certificates of Deposit usually offer a better rate than a Savings Account, but your money is locked up until the CD term is up (e.g. 36 months).  If you need to cash out before then, you pay a penalty.  Some banks have begun to offer CDs that you can cash out with no penalty at all.  These can offer better rates than the savings account.  Make sure it really is no-penalty though.  Also watch what your options are for slowly adding money over time.  This can be an issue if you want to deposit $100 from every paycheck. Rewards Checking Accounts - These are checking accounts that will pay a relatively high interest rate (3% or more) provided you generate enough activity.  Most of them will have requirements like you must have direct deposit setup with them, and you must do a minimum number of debit card transactions from the account per month.  If you can stay on top of the requirements, these can be a great deal.  If you don't stay on top of it, your interest rate usually drops back to something pitiful, though. Personally, we use the Online High-Yield Savings Account for our emergency fund.  I'm not going to make a specific recommendation as to which bank to use.  The best deal changes almost week to week.  Instead, I will say to check out Bankrate.com for a list of savings accounts and CDs that you can sort.  The Bank Deals blog is a good place to follow rate changes." First of all, a person that relies on their ability to tap a line of credit to cover an emergency isn't generally the kind of person that has investments they can cash out to cover the debt. That being said, my personal reasons for having a liquid emergency fund revolve around bank errors and identify theft. I used to work for a company that made bank software. Errors are a common occurrence. You'd be surprised how many transactions are still input by human hands despite our computerized world. All it takes is one typo to wipe out your ability to swipe plastic for a few days. This has actually happened to me. My utility company sent me a bill for $240 and wound up taking $2400 by accident, overdrawing my account and sending me into a fee spiral. They fixed their mistake... several days later. The snowball of fees from other transactions that bounced took another two months to correct. In the meantime, I also had my mortgage payment due. In the US, you can't pay your mortgage with credit, and for those who rent, many landlords won't let you pay with credit either. I have also seen this scenario play out twice with other people I've known who've had their ID stolen. Yes, the bank will cover the fraud after a lengthy process. But the disruption causes fees and overdrafts to quickly snowball out of control. I have a separate savings account at a different bank for this kind of thing, and I have a few hundred dollars cash in my house at all times. Having a liquid emergency fund allows you to quickly stabilize the situation and gives you walking around money for those times where the banking system becomes your enemy for a time. You seem to have a grasp of the basic principles involved, but your estimation of the risk you are taking seems a bit low. Your non-investment reserves are unlikely to cover your expenses for more than a month, so the chance that you would need to sell investments to cover additional expenses is high. You mention that I am flexible with the 'cash on hand' amount. For instance, for about three months I put a very tight spending/investing freeze on my life because I knew I'd be leaving jobs and moving (I already had the other job lined up). Those savings presumably went toward moving expenses, as your usual savings were insufficient. In the event that you are laid off suddenly, you might find yourself in the same position again, with added unplanned expenses like fees for breaking a lease. Your current plan involves selling investments to cover the gap. Based on your age you have probably only invested in a predominantly positive market, so the chance that you might need to sell investments for cash seems like a reasonable trade-off for the added potential gains. Your perception might change if the markets go south and you are forced to sell into a down market, possibly at a significant loss. You also don't indicate if your investments are currently sufficient to cover an extended period of unemployment. You are taking on a lot of risk under your current plan. Essentially you are trading possible investment gains for flexibility and time. By making small changes like saving at least enough to move as you did previously, you can give yourself time to react to job loss or other unexpected financial need. Rather than give the traditional emergency funds advice, I suggest you look at the broader picture. The total amount of savings/risk is up to you, but you should consider your current savings as insufficient to rely on as a safety net. I know an answer has been accepted, but you need an emergency fund, ideally enough to cover at least 3 months of after-tax basic living expenses. As a free-lancer, 6 months would be even better. This isn't a fun way to tie up your money, but it is a prudent way. What if you lose your job, or decide you want to change your line of work? What if you're told a close family member has only months to live and you want to take significant time off unpaid? What if your car breaks down and you need a new one? What if your freelance business hits a dry patch for a few months? What if you want to move but can't sell your next house quickly? I've known people who had these types of situations come up unexpectedly. Some were financially prepared and had the freedom to make the choices they wanted to make, others didn't and now have regrets. Once you have a basic emergency fund in place, then go for investing with the rest of the money. Best of luck!