From Bogleheads

Funds set aside for unexpected expenses and kept separate from retirement or other investments. The quantity of emergency funds is usually specified as an integer multiple of monthly expenses, e.g., Six months to one year's worth of expenses. Emergency funds should be invested in a highly liquid, low risk vehicle (e.g., money market, bank savings account).

The goal of the emergency fund is to provide a cushion of liquidity^[1] in the event of unexpected expenses.

It is generally best to establish a modest emergency fund and pay down high-interest-rate debt (such as credit card debt) before investing in equities.

Cash Emergency Fund vs Line of Credit

Some people view various forms of credit (particularly HELOCs^[2]) as suitable for emergency funds; others strongly disagree. Credit lines can often be withdrawn with little or no notice, and some emergencies which require drawing on the emergency fund may also cause a creditor to question your ability to repay.

References

1. ↑ Liquidity, on Investopedia
2. ↑ Home Equity Line of Credit, on Wikipedia

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