Emergency fund: how much money you need and where to keep it
There is a widespread misunderstanding about the emergency fund: it is presented as "saving just in case", a kind of preventive stinginess typical of fearful people.
It is exactly the opposite. An emergency fund is not a lack of ambition. It is what lets you make good decisions when everything goes wrong, and what gives you room to take risks elsewhere, like changing jobs or starting to invest, without gambling your stability.
What happens when you don't have one
Without a cushion, any unexpected event leaves you with two bad options: going into debt at a cost you don't control or making a desperate decision under pressure.
In The Price of Not Knowing, Iván, a 23-year-old delivery rider, lives through the same kind of unexpected event twice. The first time, with no cushion, he has to take out a quick loan at a sky-high interest rate. A year later the laptop he needs for his degree internship breaks, but this time he pays for it from his fund and in the following months he fills it up again. The difference wasn't luck, but having the money already set aside.
And something worth repeating: using the fund and replenishing it is not a failure. It is exactly what it exists for.
How much you need
The most common reference is between 3 and 6 months of your essential expenses.
Careful: of your essential expenses, not of your salary. That is, what is indispensable to live with dignity: housing, food, transport, utilities and insurance. No leisure or treats.
Example: if your essential expenses are around €900 a month, your target would be between €2,700 (3 months) and €5,400 (6 months).
Are you closer to 3 or 6?
- Closer to 6 months if your income is variable (freelance, commissions, project work), if you have a temporary contract or if other people depend on you.
- 3 months may be enough to start if you have stable income and few obligations.
It may seem like a distant figure, and that is normal. Iván took fourteen months to complete his, with small and irregular contributions. What matters is not speed, but that it exists as a separate goal from now on.
Where to keep it
This is the part where most people go wrong. The job of the emergency fund is not to grow, but to be available without losing value the day you need it.
That is why:
- Yes: an interest-bearing account or a savings account with no fees, that lets you take the money out immediately. In Spain, deposits at institutions that belong to the Deposit Guarantee Fund (Fondo de Garantía de Depósitos) are covered up to €100,000 per holder and institution.
- It can also work, for part of the fund, a low-risk money market fund, bearing in mind that redemption can take a day or so.
- No: stocks, cryptocurrencies or any product that could drop in value at the worst moment. Personal crises and market downturns have a bad habit of coinciding, for example, when there are layoffs.
And if you want it to earn more? If you accumulate more than you need as a cushion, that surplus can indeed go into investing. The part that acts as a cushion, no.
The trick to avoid spending it
Marcos, another of the book's cases, took more than two years to complete his fund. Every time he gathered a decent amount, "something important" came up: a trip, a new phone.
He didn't lack willpower. He had too much ease. The change came when he moved the fund to a different institution from the one he used every day, with no associated card and no access from his usual app. He didn't change his character: he changed the number of steps needed to touch the money. And that was enough.
Your Action Protocol (24 hours)
- Calculate your monthly essential expenses. Only what is indispensable.
- Multiply them by 3 and by 6 to get your target range.
- Open a separate account today for the fund, even if you only put in one euro. What matters is that it exists as a container distinct from the rest of your money.
The first brick
In The Price of Not Knowing, the emergency fund is the base of the Shield bucket, the first of the 3-bucket system. Without it, any investment plan you build afterward is fragile, because the first unexpected event will force you to dismantle it.
It is, as the book itself admits, the least glamorous chapter. And, by a long way, the most important asset you are going to build while young.
This article is for informational purposes and does not constitute personalized financial advice.
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