Emergency Fund
3-6 months sizing, where to park it, and the cost of NOT having one
March 2020. The S&P 500 drops 34% in twenty-three trading days. Your company announces layoffs.
You need three months of living expenses immediately — rent, groceries, insurance premiums, the car payment. If those three months are sitting in a high-yield savings account earning 4-5%, you withdraw them, cover your bills, and wait for both the job market and the stock market to recover. You never sell a share.
If those three months are invested in stocks — as many personal finance influencers recommend — you must sell at the worst possible moment. You lock in a 34% loss on capital you needed for survival. The emergency fund is not an investment.
It is insurance against being forced to sell your investments at the worst possible time. An emergency fund is a liquidity reserve — money held in a safe, instantly accessible vehicle whose sole purpose is to cover unexpected expenses or income disruptions without requiring you to sell investments, take on debt, or make financial decisions under duress.
That is the opening. Finishing a lesson is where it stops being interesting and starts being useful: the full lesson runs to 6 sections and ends with 5 practice questions. A free account is what opens the rest, and the other 255 lessons in the Academy with it. No card.
What this lesson covers
- 1What an emergency fund actually is
- 2Sizing your reserve: the stability spectrum
- 3Where to park it: the vehicle hierarchy
- 4The cost of NOT having an emergency fund
- 5Size your emergency fund
- 6Historical market crashes