How an emergency fund can help you invest better

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I think that having an emergency fund can help you invest better.

As a reminder, an emergency fund is simply an amount of money set aside ($1,000 or more), which is only to be accessed in-case of a financial emergency – such as losing your job.

Shares might be described as the riskiest asset class, but I would actually describe it as the most volatile over short-term and medium-term time periods. Some people may describe volatility as risk and feel hesitant about investing.

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I think investing in shares is the best way to go to build wealth, but you may only feel confident going for the ‘growthier’ options like Altium Limited (ASX: ALU), Xero Limited (ASX: XRO) or iShares S&P 500 ETF (ASX: IVV) if you actually have some more defensive assets set aside to give yourself security.

One of Australia’s leading fund managers, Magellan Financial Group Ltd (ASX: MFG), runs two different portfolios in the same portfolio to achieve its long-term outperformance. One portfolio is growth-focused and is invested in shares like Facebook and Alphabet (Google) and the other portfolio is defensive with cash and defensive shares like HCA Healthcare.

One of the world’s greatest investors likes to have a significant cash pile set aside for rainy days. Warren Buffett likes to have at least US$20 billion cash set aside in Berkshire Hathaway in-case another GFC happens.

By having some certainty set aside with cash, you can invest for better long-term returns with the top growth shares.

So, if you have your cash set aside as an emergency fund, which are the best ASX shares to own? I would suggest by starting to look at these long-term ASX stocks which have already beaten the market.

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Motley Fool contributor Tristan Harrison owns shares of Altium. The Motley Fool Australia owns shares of Altium and Xero. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.