There are a few versions of the rule relating to how much money you should keep within arm’s reach for an emergency or indeed a rainy day.

So how much is a sensible amount to keep near at hand? One month’s salary? Three months’ salary? I think these don’t go nearly far enough. I recommend keeping up to three year’s living expenses in a liquid/easily accessible form; everything else should be invested.

In case you think this is excessive, let me explain. Having access of up to three years’ living expenses allows you to handle fairly substantial unexpected expenses. These expenses typically rotate around changing the car, doing up the garden, even converting your bathroom to a wet room or installing a chair lift, without – and this is critical – having to encash any investment or pension funds.

In the event that all bar up to three years of living expenses has been set aside as accessible savings, everything else should be invested. The term of three years tallies with the time required to recover from a market crash, without having to encash any of your investment units.

Leave your longer-term investments where they are

Longer-term investments are not for emergency or unexpected expenses; they are in place for later life, when your income dries up. Though if you’ve been reading my newsletter, you’ll know that I am not a fan of fixed-term investments for the reasons I pointed out in this blog late last year. And yes, I’m not a fan over an over-exposure to property either. But you knew that already!

My second reason not to use your invested money for emergency or rainy day expenses is very apparent if you look at the stock markets in the six months. Sell stocks now and you are selling in a volatile market, which means you crystallise your losses.

Wouldn’t it make more sense to leave those investments alone and ride out the storm? It means you exit when the stocks are more valuable, more valuable than when you bought them it is hoped! Volatility is cyclical; it would be nice to have the luxury of deciding at what point in the cycle to sell.

Your investments are subject to volatility; that’s how the markets. But volatility quickly gets registered as a loss if you cash out your chips and walk away from the table.

Liquids and solids

I don’t think you’ll need any help seeing my point when it comes to bricks and mortar. if the bulk of your wealth (except, of course, one month’s salary) is in bricks and mortar, what happens when you need to spend money on the house or garden or as the result of an illness?

You can sell a property of course but it could be rather like using a sledgehammer to crack a nut, and just like stocks, property prices are volatile too. It would be quite sickening to have to sell in a depressed market.

Keep calm and start saving

I can hear you shouting at your phone: “My money won’t make diddly squat in a bank or post office!” and this is true. But remember, if you are invested in a portfolio from any of the life assurance companies, the chances are a growing portion of your mixed-asset investment fund is being ‘invested’ in cash and low-risk assets like bonds. You may not even realise this, but you are paying hefty fees for the privilege. It’s time that this practice stops.

It would be very nice to lead a comfortable life in retirement, to be able to do the things you want when you want without cannibalizing your investments because of poor planning.

Planning for the years ahead starts here.