this post was submitted on 30 Mar 2024
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I honestly think the "6 months of salary in an emergency fund"-advice is a bit overblown and certainly not universally applicable.
An emergency fund must per definition be very liquid in order to fulfill its purpose, hence you can only really place the money in a simple savings account with a not-so-spectacular interest rate. This means that the opportunity cost of having 6 months of salary in an emergency fund is the delta of expected return on investment in a higher-yield method of savings, such as placing the money in index funds. This can be quite significant, in particular since saving up 6 months of salary is not an easy task for the average person.
If you had the money placed in investments, the money would be less liquid, and there's the chance that you may have to liquidate it during a downturn, which would of course suck a little. Consider carefully under which scenarios you would have to liquidate, though:
Now, there's an argument to be made that these insurance policies might be a bit slow to pay out, and that I might need to be a bit more liquid to cover the expenses temporarily. I have a solution for that too - credit cards. With credit cards I can make a short-term loan that should bridge over most issues until I can either get money from any of my insurance policies, or worst case have time to liquidate some of my higher-yield investments.
So yeah, that's my plan. It does not involve 6 months of salary being invested in a low-yield savings account, because that'd lose me a lot of money. I dislike the fact that the 6 months emergency fund is basically parroted as religious gospel, and it feels like people who repeat it have not thought about the issue thoroughly.
You could also consider a ladder of cds as an example, but then you either have to continually re-up 6 month cds or go for a year of them, each for about your monthly expenses.
I just take the 4% interest (or whatever rapidly changing amount ally bank offers me on savings since they update a lot) and roll with it. For now it's a similar ROI to renting a property without all the fuss of... Buying a property and doing the work lol.