Having an emergency fund sounds like a simple idea. You put some money aside and only use it when something unexpected happens. But where should you actually keep that money?
For many people, the answer is simply their normal bank account. It is easy, safe and the money is always there. The problem is that the money may earn almost nothing while prices continue to go up due to inflation
So, are there better options?
First, what is an emergency fund?
An emergency fund is money that you keep for things you did not plan for. It could be a broken car, an expensive repair at home, losing your job, or a large unexpected bill. And make no mistake, these things will happen. We just don't know when or how much they will cost. We can only hope they don't all happen at once.
The important thing is that this money should be easy to access. An emergency fund is not money that you should invest in something risky.
A common target is something like six months of essential expenses. But this does not have to happen quickly. If you can only save 25€ or €50 per month, that is still a good start. The first 500€ or 1000€ can already make a big difference and give you some piece of mind.
Option 1: Your normal bank account
Banks are slowly improving their options, and some now let you put money aside in separate “Save Up” accounts where you can give the account any name or goal you want. What really matters is keeping this money separate from the rest of your everyday spending money. This is probably the easiest option. You can access the money immediately and you do not have to think about investments, markets or complicated products. The downside is that many current accounts pay little or no interest. For someone who is just starting to save, this can still be a perfectly reasonable place for the first part of an emergency fund.
Option 2: A savings account
A savings account can be a better option if it pays interest. You still have relatively easy access to your money, but at least your savings are earning something. The important thing is to check the conditions. Some accounts have limits, promotional rates or require you to keep the money there for a certain period Do not just choose an account just because the interest rate looks good at first.
Option 3: A money market fund
This is another possibility, especially for people who already use an investment platform. Money market funds invest in very short-term assets and are generally considered much less risky than stock market investments. However, they are still investments. The value can move and the money may not be available in exactly the same way as cash in a bank account.
!!! For this reason, I would not put all of my emergency fund here !!!
What about an ETF?
An ETF such as a global stock market ETF can be a great investment for long-term goals. But an emergency fund has a different job. Imagine that you lose your job during a market crash. You may need your money at exactly the moment when your ETF is down 20% or 30%. You would then have to sell at a bad time.
That is why I prefer to keep emergency money separate from long-term investments.
What I would do
Personally, I would keep the money in a simple place where I know it is available when I need it. For example, I could keep one month of expenses in an easily accessible savings account and then build the rest slowly. There is no need to find the perfect solution. The most important thing is actually having the money. A 1000€ emergency fund earning a small amount of interest is much more useful than a 10000€ investment that you may have to sell at the worst possible moment.
Building an emergency fund is not exciting, but when something unexpected happens, you will probably be very happy that you did it.
