Unit 2 · Level 1 · The emergency fund
Where it lives
An emergency fund has one job description: be there, in full, on the day you ask for it. That means instant or near-instant access, and capital that does not move. An instant access savings account does this. So does a money market fund, which holds very short-term government and bank debt and stays close to a stable value. What does not do it: shares, funds, crypto, or anything locked for a fixed term. Keep it in a separate account from your day-to-day one, so you do not spend it by accident.
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What you get asked
What are the two things an account holding your emergency fund must do?
Available and stable. Everything else, including the interest rate, is a bonus you take only if it costs you neither of those two.
Match each place to whether it can hold an emergency fund
Two of the rejected options are perfectly good products. They are simply the wrong tool for this one job.
You keep €6,000 in an instant access account paying 2.5% a year instead of a locked account paying 3.2%. How many euros of interest does that choice cost you over one year?
€42. That is the real price of staying liquid, and it is genuinely small next to selling investments at a 30% discount because your money was locked up.
For the emergency fund, ___ is the wrong thing to optimise. Availability comes first, always.
Chasing an extra percent here is optimising the wrong variable. Take the best rate you can find among accounts that pay out immediately, then stop looking.
A friend moves their whole buffer into a stock fund because savings rates look low. What has changed?
Emergencies and market falls both tend to arrive when the economy turns. Putting the buffer in the market links the two things you most wanted kept apart. 🐜
The rest of this unit
The cash buffer that has to exist before any market does, because it is what stops a bad month from becoming a forced sale.