Emergency fund calculator — the price of the buffer

The buffer is your monthly expenses multiplied by the number of months you choose, and it is projected two ways over your horizon: compounded annually at the deposit rate, and compounded annually at the expected investment return. The gap between the two lines each year is the opportunity cost. No contributions are added to either side, because the question is about one fixed sum held two different ways — adding a contribution stream would swamp the comparison with the contributions.

A fixed deposit rate held for decades is the biggest simplification, and it cuts both ways: deposit rates were near zero for a decade and have been well above two percent since. The expected return is likewise a single fixed rate with no drawdowns in it, which makes the invested line look smoother than the thing it is insuring against. Neither side is taxed, which flatters cash in the Netherlands and Italy, where the buffer itself is charged annually.

Should the emergency fund be invested instead?

That would defeat what it is for. The scenario a buffer exists for — losing income — correlates with the scenario that depresses markets, so an invested buffer is smallest exactly when you need it. That is the sequence risk mechanism at household scale: being forced to sell into a fall converts a temporary drawdown into a permanent loss. The gap this page shows is the price of not being in that position.

How many months of expenses are actually right?

It follows from your circumstances rather than from the convention. Two secure incomes, low fixed costs and a short notice period argue for the low end; a single income, a mortgage, self-employment or a specialised role that takes months to replace argue for the high end. The slider is there so you can price each answer rather than accept a default, and the difference between three and twelve months is usually large enough to be worth thinking about for an afternoon.

Does the deposit rate ever close the gap?

Only if it matches the expected investment return, which is the note under the chart. That has not been a durable state of affairs — deposits are priced off short rates and equities are not, and the periods where the two converge are brief. Chasing the gap by shrinking the buffer trades a certain, immediate protection against an uncertain, distant gain.

• Purchasing power — what inflation and Box 3 do to cash
• What waiting costs — cash on deposit versus invested
• Loss tolerance — what each allocation lost in three real crashes