Emergency Fund – Do you Really Need One in 2024?
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If you are interested in personal finance, you probably have encountered the concept of emergency funds. An emergency fund is simply some money available directly that you can use for emergencies. Most people will advise you to get such an account. And they will insist heavily on this subject.
It is an interesting subject since not everybody agrees on the importance of the emergency fund. Some people have an emergency fund that can cover one year of expenses. And some people think you do not need one.
An emergency fund is a good thing. But you should be aware of its cost. It also has disadvantages. And you may not need an emergency fund as big as some people tell you. Too many people put too much emphasis on their emergency funds.
In this article, we see both sides of the story. We see in detail what an emergency fund is and whether you should have one.
Emergency Funds
An emergency fund is a bank account where you store some money you may need for emergencies.
A general rule of thumb is to store three to six months of your expenses. But some people will save away more than one year of expense. We will explore below how much you should have in your emergency fund.
It is important to base your emergency fund on your expenses and not on your income. You are not spending your income! Or at least, you should not!
Reasons for having an emergency fund
Why should you have an emergency fund? In an emergency, you have money available to pay for it.
Here are a few examples:
- Imagine you have a huge medical bill coming (2500 CHF), can you pay it?
- Or if your car breaks down and you have to replace it.
- Your house is flooded, and you have to pay a large bill.
- Your phone breaks, and you have to replace it.
Many more reasons make people want to have an emergency fund.
Being able to pay for emergencies is the first level of personal finance. This should be your priority. But these funds have a high cost. And most people do not consider this cost when they advise an emergency fund. We will cover this fund in this article as well.
Where should you keep your emergency fund?
You should have your emergency fund in a very liquid account.
It does not make sense to invest your emergency fund in highly liquid stocks. If you need the money today, you may have to sell at a terrible price. It should be in a savings bank account.
Ideally, you want to save the money in a high-interest bank account. However, sometimes this is not possible. For instance, some bank accounts have limitations regarding when you can withdraw the money. You want this money to be available instantly.
And in some countries, bank accounts have no interest rates, like in Switzerland these last years. In this case, you can keep it in your salary bank account. This makes it very easy. This is what we are doing.
If you feel like you need a separate bank account, feel free to separate it. Just ensure you are not paying any fees to store your emergency money!
Some people save their emergency fund in a money-market account. If you have a good account like this available, it may be a good option. They generally have higher yields. But you need to make sure you can withdraw the money easily and for free.
If you want a free bank account for your emergency fund, read my article about the best banks in Switzerland.
The cost of an emergency fund
Most people never consider the downsides of an emergency fund. There are several disadvantages to having an emergency fund. You must balance these disadvantages to know how big of a fund you need.
The opportunity cost
Emergency Funds have one big problem: The opportunity cost.
The simple fact of not investing this money costs you. Opportunity costs are something that many people never consider. But it is an essential concept.
Instead of having this money in a savings account, you could invest it in an ETF that would give you an average of 5% per year (and I am conservative). So you are losing out on these returns.
We can take my current emergency fund of 15000 CHF as an example. Investing it in the stock market could yield 750 CHF per year. This is a lot! And this is not taking into account compounding interest over the years.
You need to be aware of this. If you have access to high yielding interest account, it may be acceptable. But we do not have anything like this in Switzerland.
If your savings account yields less than inflation, you are losing money every year. In most countries, saving accounts have lower interest rates than inflation. This is almost always the case.
If you want an emergency fund, there is nothing you can do about this cost. But maybe you do not need one. Or maybe you need a smaller one than you think?
The distraction factor
Many do not realize that having a large emergency fund will distract you from your other financial goals.
If you set yourself to save one year of expenses for emergencies, you will need quite some time to do it. For most people, this will probably take a few years. This means that during this time, you will have no money to work on your other goals.
Having a smaller fund would let you work on your other goals as well. For instance, this could let you reduce your debts. Or you could save money towards a down payment on a house.
The temptation factor
There is another cost related to emergency funds: The Temptation.
Some people may be tempted to use the money in their emergency accounts. This should not happen to frugal and responsible people. But this is something that may happen. You may think it is a good place to take money for that brand-new TV you wanted!
If you start taking money out of this fund without an emergency, it becomes useless. You may well not have money on it when you need it!
Do you need an emergency fund?
You may not need an emergency fund as much as you think. Or at least, you may not need it to be as big as you think. There are a lot of people living very well without one. It is a myth that everybody needs a large emergency fund.
Of course, not having an emergency will not prevent you from having to pay for an emergency if it happens. So, how to pay if there is an emergency and you do not have enough in your emergency fund?
- With your credit card.
- Use your next paycheck to pay it.
- Get a margin loan.
- Sell some equities.
If you have a large limit on your credit card, you can pay many emergency bills with it. Or withdraw money to pay for them. If you are saving a large percentage of your income, you have a large part of your salary to pay for emergencies each month. That just means you will invest less the following month.
If this is enough, you have two more options. The first is to get a margin loan from your broker, based on your investment portfolio, if you have any. And then, the worst option is to sell your equities and get cash to pay for your emergencies.
And a lot of risks are not as great as you think:
- If you have health insurance, you only have to pay the deductible and retention fee. This is 3200 CHF for me.
- If you have car insurance, you only have to pay the deductible. This is 1000 CHF for me at maximum.
- If you get fired or do not find a new job after the current one, you should receive unemployment benefits for several months. And unless you did something wrong, you will get a severance package if you get fired.
- If I die, I have life insurance with which my wife can live for several years.
- Lots of things can be planned. For instance, it is not very difficult to estimate when you need new tires. This is something you can budget for. You should try to plan for big expenses. For a lot of people, emergencies could be avoided with better budgeting.
As you can see, you are already protected from substantial unexpected expenses. If you have a stable income, a good credit card, and you save a large part of your income, you can have a small emergency fund. Or even no emergency fund at all.
Of course, if you have no insurance for anything, this may not be the same issue. You need to study the risks you are not protected against.
Saying that everybody needs three to six months of expenses in cash is just dumb.
Of course, this will highly depend on your situation. Some people have more risks than others to lose their jobs. And this can also depend from one country to another. This is why you need to assess your own situation.
Moreover, if you know you are not good at managing money and keeping on budget, you should probably have an emergency fund. But once again, this will depend on each situation.
Emergency funds in retirement
In retirement, things will be very different.
Following the 4% withdrawal rule (or any other withdrawal rate) from The Trinty Study, you live from your withdrawals. You have two choices for this: monthly withdrawals or yearly withdrawals.
Generally, monthly withdrawals are a bit better in the long term. But yearly withdrawals are easier to manage.
If you opt for monthly withdrawals, you will only have one month of expenses in cash ready to be used. In that case, you may want to use a second account for your emergencies.
With yearly withdrawals, you do not need an emergency fund. You already have one year of expenses in a cash account. If there is an emergency, this will mean that you will have to sell shares earlier than intended.
Our emergency fund strategy
We will now talk about The Poor Swiss emergency fund.
We keep an emergency fund of 10’000 CHF. This is a bit less than two months of expenses. This is more than enough for us. I am currently keeping it in my Neon account in Spaces to get some interest in it.
We can save up to 50% of our income each month. That means one salary covers the expenses of two months. We can also cover about two months of expenses with our credit card.
Finally, we have an extensive stock portfolio. Therefore, we could get a good margin loan from Interactive Brokers if we had to pay for an emergency, without selling stocks.
So, we decided to keep 10’000 CHF for emergencies. I am comfortable with that amount for Mrs. The Poor Swiss and me.
Advocates of small emergency funds
Of course, you should not only take my word for it.
Many people in the personal finance community are advocates of small emergency funds. There are even some people who think that they are not useful.
For instance, Big ERN at earlyretirement.now has an emergency fund of 0$ and gives you 10 reasons why they are not good.
Go Curry Cracker also mentioned that Emergency Funds are overrated. If you have a strong financial status, you may not need an emergency fund as strongly as you think.
Another advocate of a smaller emergency fund is Mr. Money Mustache (Pete Adeney).
FAQ
What is an emergency fund?
An emergency fund is an amount of money that you keep ready to pay for emergencies. It should be accessible very quickly, probably in a savings account.
How much should be in an emergency fund?
How much you need in an emergency fund depends on your spending. A rule of thumb is to save between three and six months of monthly expenses in your emergency fund. But, it will also depend on how safe your job is and your risk aversion level.
Should everyone have an emergency fund?
Not necessarily. People who have a stable job and have access to a good credit line do not need an emergency fund. And most people do not need an emergency fund as big as people believe.
Conclusion
Emergency funds are a good tool to protect you against big emergency expenses. However, they have a high cost because that money is sleeping without bringing any interest. Generally, bank account interest is lower than inflation. So your emergency money is losing value every year. Moreover, you are generally more protected against big expenses than you think.
In my opinion, you should not have too big of an emergency fund. If you have an income, having eight months of expenses saved is not necessary at all. If you can save much of your salary, you are already covered for some big expenses. And, of course, you need savings! Nobody advises you to have zero savings. But you should invest most of your savings.
Everybody should have a small emergency fund of at least one month of expenses. But having more may not be as necessary as other people would tell you. And having a huge reserve harms your finances.
If your financial situation is bad, the first thing you need to do is to get out of high-interest debt. Then, you need to increase your savings rate as much as possible. The emergency fund will only come after this. And once you start saving more money, it will come naturally.
Now, as always, it is important to find the solution that works for you. If you cannot sleep without six months of expenses in your bank account, just do it, and do not let anybody tell you it is bad! And if you can sleep with zero emergency funds, do the same!
To learn about another kind of fund, you can read my article about the opportunity fund.
Do you have an emergency fund? How many months of expenses do you keep into it?
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You do not have to be a resident of LU to open a LUKB savings account. Though there are some restriction.
Details are here: https://www.lukb.ch/de/private/zahlen-sparen/konten-zum-sparen/sparkonto
Thanks for the details, this is great to know!
Hey Baptiste,
Thanks for an interesting read.
Somewhat related question – do you have maybe an article about insurances in general? I mean not only life insurance, but also “smaller” ones like for legal advice, house contents etc. I find it somewhat hard to navigate and a lot of what is offered or “advised” by companies seems to not be worth it.
Thanks and cheers,
Chris
Thanks
Hi Chris,
I have a few articles about insurance, you can search for insurance.
Let me know if you think one article is missing :)
I have put my energency fund now in LUKB, which offers 0.75% interest — that’s 50% more than Yuh!
If you only operate a savings account, there is no fee.
It is possible to open an account even if you never visit a branch through online ID verification. This is especially convenient if you don’t live near LU.
AFAIK, LUKB offers the best savings accounts with the least strings attached.
Thanks for sharing!
Can anybody open an account or only people from the canton? How is the app?
Could you comment or make a post about Life Insurance? We know combination with 3rd Pillar is not a good decision, but in what circumstances does it make sense to have separate life insurance and what are some good recommendations? I think this is an often overlooked topic. For example, I was never interested, but now we are buying a house and are considering one to reduce the burden should one of us pass away.
Hi Poor Basler,
I have an article about life insurance planned for next month :)
I will cover how to choose one and who may need it.
I am retired with a modest (v.small) income.
Although I have a 2500 CHF franchise on health insurance, Assura also add 700 CHF – just to say that 2500 may not be enough for that large medical bill. Like you, I keep my emergency fund in my salary account.
You mention preparing for death, and I am about to read your article on preparing for it, so to speak ; one thing that can be more difficult than death is incapacity, severe illness or coma. In the UK there is ‘a living will’ in case this happens. In Switzerland, I wonder if a similar thing also exists?
Thanks,
Jane
By the way I really appreciated your article on living cheaply in Switzerland. Thanks!
Hi,
Assura does not add 700 CHF, this is the same for each health insurance.
Yes, you can also have a living will, mostly for medical treatments. For instance, you can say that they will not try to wake you up from coma or if you risk to be in vegetable state.
Hi The Poor Swiss,
I guess she is taking about Quote-Part, which is that once your reached the 2500 CHF limit, you pay 10% of your bills until 700CHF.
Thank you for your interesting article!
Hey Baptiste,
Does your wife also have access to the emergency fund? Would she be able to pay the monthly costs herself if something happened to you? As far as I know, in the event of death/care, the account is blocked and can only be released upon presentation of a certificate of inheritance/provision and an ID card. The only question is how long this procedure will take, since the bills must continue to be paid. If the documents are not available, it must be clarified who the heirs are or who has the health care power of attorney and this process would take even longer.
Regards
Marco
Hi Marco,
Good question. Actually, our emergency fund is our checking account and it’s a joint account. She also has access to our IBKR joint account.
I am documenting everything on our disaster file: Disaster File – A Simple Way to Prepare for Your Death
Hey Baptiste
I’m starting to calculate my emergency fund and was wondering how and if you calculated emergencies for your house in it as well? Let’s say that your roof starts leaking or your heating breaks down. It seems like an emergency fund of 10’000 is a bit too low to cover that. As I’m a house owner myself, I was wondering what you think about this.
Thank you for your answer.
Philip
Hi Philip,
Good point. If my roof were to leak and required emergency repair, I would not mind selling stocks since this is a very rare event. You also have to weigh down the probability of an event. You do not want to be ready to cover all your emergencies. An emergency fund is like an insurance, it’s a balance.
We have not increased our emergency fund since buying a house.
What is your recommendation for life insurance?
I don’t have a specific company to recommend.
The only thing I recommend is to not use a 3a life insurance. If you need life insurance, take a proper life insurance policy and use a proper third pillar like finpension.
I do not have a dedicated emergency fund.. I always keep at least 7.5k in my account at Migros Bank, but only because then they don’t charge you a monthly fee.
In case of an unexpected larger bill, I count on having 30 days time to pay it, so I would get another salary to pay the bill (then saving/investing a smaller portion of that salary in this month). Should it not be enough, I can use my CC to get additional money, which also has a payment deadline of about a month. Should this still not be enough (already getting quite unlikely here) I can start using my “minimum 7.5k for free account” money, which will only cost me 3CHF per month in account fees until it is back up to 7.5k. Not sure how they would calculate this, my suspicion is they will charge you the full fee if your account drops below 7.5k for even a second, but we are talking about 3CHF in an emergency, so no big deal.
I think I can afford this approach because of one main reason: I consider my income to be very stable. I don’t think I have to protect against the risk of income loss with an emergency fund. My profession (software engineering) is always in high demand. Even if my company should have to severely downsize for whatever reason, they have to give you at least three months notice, which should be enough time to find another job. And if that doesn’t work, there is good unemployment aid from the government for an extended period of time.
Obviously, this is a comfortable situation which I’m very grateful for. It does not apply to everyone, even in Switzerland. If you cannot count on your income to be stable, e.g. because your job sector is volatile, or you have high variance in your salary depending on orders/contracts, then I would consider my approach way too risky. In this case, I would consider the risk of income loss with a dedicated emergency of at least three months of expenses.
Hi EarnestPear,
This is a great strategy!
I agree that in case of an emergency, the 3CHF for account management is negligible.
This is a great example of the fact that emergency funds are different for everybody!
The only thing in my side I also consider is if my car entirely broke down. In that case, I would need to buy a new one but it’s unlikely that I have to buy one within 30 days too. If you have a large income (and are saving a large part of it!), you can also use that as your emergency fund. You are right that most emergency bills in Switzerland are not that urgent :)
As you said, you could probably live with zero CHF in your account (if Migros was not forcing a limit).
Thanks for sharing your strategy!
In the end it boils down that you will need a buffer, that you can active, if needed. Whatever size you feel comfortable with. I dont like this concept of the emergency fund, where it is only used for “real emergencies”.
There are also several possibilities, that might not be a emergency per se, but requires you to spend a large amount of money. This could be:
Unemployment (Possible that you wait several months for some money, due to high salary, not writing enough applications, job loss is your fault, etc.).
Car suddenly breaks down.
Health issue, which is not covered by health insurance, but very important to you.
Spontaneous huge fancy vaction that you want to spoil yourself with.
I might call my it now my buffer fund:)
Hi Zueritram,
I think that emergency is subject to interpretation.
In your list, I would actually count the first three as emergencies. I would definitely not counting spoiling yourself as an emergency :) People should save for that, not using their emergency money.
And it is also true that the only thing you need is to be able to handle these unexpected expenses. You could withdraw 10K from a credit card, no need to actually have 10K in cash sitting somewhere.
We can call this fund unexpected expenses fund :)
Thanks for sharing!