Your rainy-day fund

What is an emergency fund?

An emergency fund is your safety net for a rainy day—it’s there to save you when serious, unexpected problems arise. Lose your job? You’re covered while you look for a new one. Starting your own business? The first few months without income won't be a problem. Diagnosed with an illness during a routine check-up? You don't have to wait six months; you can see a private doctor immediately!

An emergency fund is your guarantee for navigating sudden financial trouble without stress.

The core principles of an emergency fund, as you may already know, are consistent across most publications:

• It should be equivalent to your monthly expenses, meaning it should allow you to sustain yourself without any income for 3, 6, or 12 months. The size is an individual matter, depending on the level of security you need.
• It should be easily accessible and help you cover expenses quickly. Liquid assets include savings accounts and deposits, but not real estate, which can take months to sell when you need cash by tomorrow.
• It must be safe, which means avoiding high-volatility assets like stocks or cryptocurrencies. A market correction could slash the value of your fund by double digits—what will you do if you need fifty thousand zlotys, but your stocks are only worth thirty-five thousand at that moment? Say "oops"?

How big should an emergency fund be?

Theoretically, the bigger, the better. A common analogy involves financial trouble and jumping from a burning building. If you were jumping from the third floor, would you rather aim for a small pillow or the largest mattress available in the store?

Financial publications typically suggest three, six, or twelve months of expenses, along with a brief justification.

• 3 to 6 months of expenses — You manage your finances well, know how to control your costs, and can cut back when necessary. You have no dependents, and if you lose your job, you can quickly find a new one.
• 6 to 12 months of expenses — You have dependents, though you may not be the sole breadwinner, and reducing your living costs is not straightforward for you.
• Over 12 months of expenses — You run a household on your own or manage a business with irregular or unpredictable income while facing constant overheads. Your profession is specialized, making it difficult to change jobs.

This is the standard you may have encountered before. It is merely a template and a suggestion. You do not have to follow it, and the size of your emergency fund should be tailored to your individual situation.

Why should you have an emergency fund?

The emergency fund was created, to some extent, as a motivational tool for savers. It is a very pleasant and easy-to-sell piece of financial advice.

Beyond managing a household budget, it is often your first financial goal—a tool that protects you from falling back into a debt spiral when unfavorable circumstances arise. Instead of taking out a loan, you use your own savings, which is not only safer but also builds a sense of control over your own life.

An emergency fund is also a great way to gain the confidence to change jobs when you want to, rather than rotting in a miserable company just because you are one paycheck away from being homeless. You are no longer at everyone's beck and call, and you don't have to tuck your tail between your legs for every minor mistake. You can tell your boss that if they don't like it, you have fifty people waiting at the gate to take their place. Even if that's not true.

Where should you keep your emergency fund?

An emergency fund is a great idea in itself. However, the commonly repeated methods for accumulating one don't always make as much sense as you might expect.

When you start building an emergency fund and deposit all your funds into checking accounts, savings accounts, or certificates of deposit, there is no problem at all. It makes no difference for the first few thousand, and it is better for you to build the habit than to worry about optimization.

A concerning situation, which I unfortunately observe often, is building an excessive fund that just sits there doing nothing. Of course, it serves as a safety net, but beyond that, it loses value. This means you are saving money in vain.

I see discussions online where people brag about having saved a hundred thousand zlotys and keeping it in a bank account or under a mattress, so they aren't afraid of a rainy day—or even a rainy few months. That might sound sensible. But if you think about it for a moment, you will remember how inflation works.

Inflation is constantly changing, so depending on when you are reading this, it may be different, but at the time of writing this article, its official level was nearly 9%.

Saving a hundred thousand zlotys for the average person is a process that takes many months, or even years. With current inflation, such a fund loses about nine thousand zlotys in purchasing power annually. How long will it take you to save that amount? Probably quite a while, which is why such a loss is painful and, I can say with full conviction, simply pointless.

That is why, as your savings grow, you should look beyond just the highest-interest savings accounts and deposits and consider secure investment options. While they may not always beat inflation, they can at least mitigate its impact on your capital. For now, you have conquered your debt; there will be time to learn about investing later.