Do You Really Need a Six-Month Emergency Fund? A Planner Says No

It was late, and the only place still open for supper was a random coffee shop.

My friend is a financial planner. I have known him for decades. Over supper he shared some of the less conventional things he has been doing with his money, which I will keep to myself because they involve arrangements that are his to talk about, not mine. Then we landed on a topic I thought was long settled: the emergency fund.

You know the one. Six months of living expenses, parked in cash, just in case. Every financial author recommends it. Every fin-fluencer repeats it. It is one of the few pieces of money advice almost nobody argues with.

My friend argues with it. He thinks a six-month emergency fund is unnecessary.

It was the first time I had heard anyone say so. I didn't say anything, but I probably didn't need to. It was probably written all over my face.

So he asked me a question: list the situations where you would actually need it.

I fumbled. A traffic accident, I offered. A medical emergency. Then, a little embarrassingly, I ran dry. Two items, for a fund I had always accepted as essential.

Both of those, he said, are insurable events. You can't even legally drive a car without insurance. Medical bills are what health insurance is for.

I hadn't thought hard about any of this, because the standard narrative had always made sense to me. His did too, in the moment.

I tried again. What about helping your kids, say, if they get into debt? Same answer. If it is an insurable event, they should be sufficiently insured too. And if it is a man-made emergency, gambling debts or a failed business, then in his view they need to learn the lesson themselves and take responsibility. They made the bed. They lie in it.

That one landed, at least in theory. I learnt when I was young that maturity does not come with age, but with the acceptance of responsibility. It is hard to believe that and also believe parents should rush in every time.

The kids question has come up in another way lately. Two friends told us recently that they are planning to help their children with their first homes, one family in Melbourne, the other in Singapore. Different countries, same concerns, same plan. Given the way property markets are going, that conclusion is understandable.

But my view on this had already shifted before that supper. I have come to believe this kind of help can be detrimental in the long run. In Singapore, public housing policy helps young married couples get a foot in the door. Helping a child leapfrog that and go straight into private property, without working for it, takes away an experience. Maybe they struggle for a while. But in getting through it, they build financial discipline and muscle that no gift can hand them.

There is a line I believe in: if you don't know what it is to make a million dollars, you won't know what it is to keep a million dollars. A leg up into private housing on day one may not be the kindness it looks like.

Back to the emergency fund, and the part that unsettled me most. I realised that, thankfully, I have never had the kind of emergency that teaches you why the fund matters. Everything I believed about it came from what I had read and heard, not from anything I had lived through. So perhaps my friend was right, and I had simply been repeating something I had never tested.

That bothered me enough to go looking.

The first thing I found was the big one I had missed entirely at supper: a sudden, unexpected job loss. Other common examples were out-of-pocket medical or dental surgery and urgent home repairs. I am not sure those would cost months of living expenses. Losing your income, though, genuinely can, and it is not the kind of thing you can simply insure away.

Then came the distinction that reframed the whole conversation for me. There are insurable risks, and there are liquidity risks. They are not the same thing, and I think my friend may have folded one into the other.

Insurance answers the question of who pays. It doesn't always answer when. Even if you are adequately insured, a claim can take more than a while to be processed, and the bills don't wait politely while it does. There is a lag between claim and cash. Even with medical insurance, there are usually co-payments to be paid in cash, and that is if your claim is approved.

Seen that way, an emergency fund isn't really a rival to insurance. It is the bridge you stand on while insurance catches up.

So where have I landed? Somewhere in the middle, and still moving. That late supper did what good conversations do. It challenged something I had accepted without thinking and made me rethink it. I no longer treat six months of idle cash as sacred. But I still think a bit of cash within easy reach is necessary. Perhaps not six months. Or perhaps half of it in cash, and the other half in assets that are liquid but not idle. And for the genuinely big emergencies, should the need arise, I am not averse to a credit line. I suspect my friend has one tucked away himself, though I didn't ask.

It is still a work in progress. Most of the useful questions are.

When did you last test a piece of money advice you had always taken for granted?

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