Emergency fund: what it is and how to build one

Before you start investing, financial experts recommend taking one foundational step: building an emergency fund. It may not be the most exciting topic in personal finance, but it is one of the most important.

What is an emergency fund

An emergency fund is a reserve of cash or liquid assets set aside exclusively to cover unexpected situations. It is not part of your investment portfolio and should not be used for planned expenses.

Common situations where an emergency fund makes the difference:

• Job loss or income reduction — the most common reason
• Sudden illness or an unexpected medical procedure
• Car breakdown or a major home appliance failure
• Unexpected relocation costs or sudden rent increases
• Unplanned home repair expenses

Without this fund, even a small financial shock can force you to sell investments at the wrong time, take out a loan, or go into debt.

How much money should be in the fund

The general recommendation is 3 to 6 months of your essential expenses. The right amount depends on your situation.

Closer to 3 months is appropriate if:

• You have stable employment and a predictable income
• You live alone without dependants
• You have additional support networks (e.g., family)

Closer to 6–12 months is wise if:

• You are a freelancer or have irregular income
• You have children or other dependants
• You work in an industry with high layoff risk
• You live in a country with economic uncertainty

What counts as "essential expenses"

For calculating your fund, include only mandatory expenses, not your full monthly budget:

• Rent or mortgage payment
• Utilities (gas, electricity, water, internet)
• Food
• Transport (fuel, public transit, or car loan)
• Health insurance or minimum healthcare costs
• Required debt repayments

Entertainment, restaurants, travel, and subscriptions can be excluded — in a crisis you would cut these first.

Where to keep the fund

An emergency fund must meet two criteria:

1. Accessibility — the money should be available within 1–2 days
2. Safety — the risk of capital loss should be minimal

Suitable options:

• Savings or current account at a reliable bank — the simplest option. Interest is low, but funds are available at any time.
• Short-term deposit (1–3 months) — slightly higher interest, but you need to plan around the maturity date. It can be useful to split the fund into portions with staggered maturities.
• Interest-bearing current account — some banks offer accounts that combine liquidity with a small return.

What to avoid:

• Large amounts of cash at home — theft risk and erosion by inflation
• Stocks or investment instruments — they may drop in value precisely when you need the money
• Locked deposits with heavy early-withdrawal penalties

How to start building the fund

If you don't have a fund yet — don't try to save the full amount at once. Build it step by step.

Step 1: Set a minimum goal

Start with 1 month of essential expenses. This is a realistic target that most people can reach within a few months.

Step 2: Open a separate account

Keep the fund separate from your everyday account — this makes it less tempting to spend. Transfer a fixed amount every month as soon as you receive income.

Step 3: Gradually increase the target

Once you reach 1 month, aim for 3 months, then 6. There's no need to rush: consistency matters more than the size of each contribution.

Step 4: Don't use the fund for "near-emergencies"

A new phone, a holiday, or a sale item is not an emergency. The fund is for genuine crises. If you do use it, replenish it as quickly as possible.

The fund and investing: the right order

A common mistake is starting to invest before building an emergency fund. This is risky: if a crisis hits, you may be forced to sell assets — possibly at a loss.

The recommended order:

1. Build your emergency fund (at least 3 months of expenses)
2. Pay off expensive consumer debt (if any)
3. Start investing

Only with a financial buffer in place can you hold investments calmly through market downturns without panic-selling at the worst moment.

Conclusion

An emergency fund is not a luxury or "idle money." It is the foundation of financial stability that protects both you and your investments from the unexpected. Start building it before you open a brokerage account.

Use our Emergency Fund Calculator to find out how much you need and how close you already are.