Emergency fund

In short: An emergency fund is a cash reserve for unexpected expenses such as a broken washing machine, a car repair or loss of a job.

In more detail: A common rule of thumb is three to six months of expenses, available at any time (savings account or current account). It does not belong in shares or long-term investments, because in an emergency you cannot wait for a good price.

Our context: The budget book calculates how many months your current balance lasts at your past spending (“runway”).

In Depth

Not investment advice.

• Building it: First a small buffer of about one month, then gradually more.
• What for: The unforeseeable. Predictable costs such as holidays or an annual bill go into a separate account (“sinking funds”).
• How much: It depends on fixed costs, job security and family. The self-employed usually need more.
• After use: Refill the emergency fund before pursuing other savings goals.

See also: Budget book, 50/30/20 rule