For example, you need less in an emergency fund if you have adequate insurance coverage. You need an emergency fund so you do not have to cash in investments to cover a financial emergency. Should such an emergency occur, it may not be the best time to cash in those investments, or you may have to pay a penalty to get your money. An emergency fund provides you with cash to cover financial emergencies. Emergency funds should be kept liquid.
Liquidity means such funds are in the form of cash or easily converted to cash.
Examples of where you may want to keep your emergency fund include passbook savings, short-term certificates of deposit, or money market accounts. Having adequate insurance for your situation is a second prerequisite to investing. You'll need health insurance with good major medical and catastrophic coverage, disability income insurance for breadwinners, life insurance as income protection for dependents, property and vehicle insurance for your possessions, and liability coverage . Exactly what type of insurance and how much is needed is determined by your situation. Through an employer or on your own with an Individual Retirement Account, Keogh, or similar type of plan, make regular contributions for retirement.