Having an emergency fund is one of the most important pillars of personal financial management.

It is similar to building the foundation of a house: if the foundation is not solid, the entire structure becomes unstable.

Without an emergency fund, personal finances are exposed to unexpected events that can happen at any time, such as a sudden job loss, an urgent car repair, or an unforeseen medical expense.

Let’s think of our financial life as a pyramid.

At the top are our dreams and financial goals: buying a home, retiring comfortably, or paying for our children’s university education.

However, to reach the top, we must first be prepared to face the potential obstacles along the way.

This is where the emergency fund comes into play.

Without solid foundations, the entire pyramid risks collapsing at the first gust of wind.

Therefore, in this savings and reserve “drawer” we set aside money that may be needed to deal with unexpected events: extraordinary expenses and emergencies that are not worth insuring.

We are not referring to large and foreseeable expenses, such as renovating a building’s facade, buying a car, replacing a kitchen, or paying for a wedding or children’s university education.

These should be planned using other financial tools: short-term planned purchases should go into a dedicated savings bucket, while long-term goals belong in the investment bucket.

The emergency fund, instead, should contain capital that may be used for unforeseen situations, such as:

• a minor but unexpected medical expense;
• car repairs;
• loss or theft of a smartphone;
• breakdown or replacement of household appliances;
• a temporary drop in income (due to unemployment, a job change, reduced business revenue, or corporate restructuring).

This is a psychologically crucial goal that goes hand in hand with insurance planning.

With insurance, we transfer rare but high-impact risks. With the emergency fund, we personally absorb low-severity, low-financial-impact risks.

We prepare ourselves to pay for these events out of pocket, without stress, should they occur.

This is what proper risk management looks like.

An emergency fund provides security and peace of mind—two factors we all seek—and, most importantly, it allows us to face with greater calm the typical fluctuations of the other sections of our financial pyramid.

When long-term investment goals—often largely exposed to the stock market—experience downturns, this emergency reserve, together with a well-organized personal budget and adequate insurance coverage, allows you to stay calm.

And to face market downturns without risking financial distress.

On the other hand, it makes no sense to overfund this reserve with excessive amounts of money.

How Much Money Should You Set Aside?

Determining how much money to set aside in an emergency fund is a crucial step.

The concept is simple: you need to save enough to cover your essential expenses for a period of time during which you cannot rely on your regular income.

Generally, for people with a fixed salary, the recommendation is to save the equivalent of at least six months of expenses.

For self-employed workers and entrepreneurs, the recommended amount is higher—between 8 and 12 months—due to the greater instability of their income.

Let’s look at a practical example:

If your essential monthly expenses amount to €1,500 (including rent, utilities, food, transportation, and other unavoidable costs), an employee should aim to set aside around €9,000 (€1,500 × 6 months).

If you are self-employed, it would be ideal to save a larger amount, such as €12,000 or even €18,000.

This financial cushion will allow you to face periods of uncertainty without putting your financial stability at risk.

Given the importance of this topic, Plannix includes a dedicated section that measures and analyzes whether you have sufficient liquidity to cover daily expenses and unexpected events.

Where Should You Keep Your Emergency Fund?

Beyond knowing how much to save, it is important to decide where to keep your emergency fund.

Liquidity is the key factor: the money must be easily accessible.

At the same time, it should be kept separate from the money you use for everyday expenses, to avoid dipping into it for non-essential spending.

A savings account (or deposit account) is a good option: it provides quick access to liquidity while keeping your money safe and protected from market risks. This is crucial—an emergency fund should not be invested in stocks or other volatile instruments.

Imagine needing that money exactly when the markets are crashing: you might be forced to sell investments at an unfavorable price, potentially compromising your financial future.

On the other hand, keeping your emergency fund in safe instruments allows you to maintain the peace of mind needed to face crises without making impulsive decisions.

One of the most useful approaches is the so-called “barbell strategy,” conceptualized by Nassim Nicholas Taleb.

This strategy involves dividing your financial resources into two categories: one conservative and safe, and one speculative and risky.

The emergency fund belongs to the safe side.

This money must be protected from any form of risk and kept in easily accessible accounts. Once this fund is firmly in place, you can start thinking about riskier investments, such as stocks or cryptocurrencies.

The barbell metaphor helps illustrate the importance of balance between safety and risk.

It is like having one end of the barbell filled with stability and security to handle emergencies, while the other end—dedicated to speculative investments—can fluctuate more freely.

Even if losses occur on the speculative side, the emergency fund remains intact, ready to protect you from unexpected events.

Of course, a savings or deposit account is not the only tool for managing liquidity.

Today, with the rise in central bank interest rates and, consequently, higher yields on government bonds, there are also other options to consider, such as individual government bonds and money market ETFs.

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