Do we really need six months to two years of emergency funds?

Before the Pandemic, the entire FIRE community was adamant on having six months of emergency funds. Before anyone even starts paying off their debts, it is advised to save up to six months of expenses. Now due to the pandemic, almost everyone is advocating up to two years of expenses saved. But do we really need them?

There’s an alternate voice emerging from the community that two years or even six months is not required. Apparently something about opportunity cost. Essentially, by locking up so much of cash you will miss out on the opportunity to invest it and lose out on the compounding effect. However, this is applicable to only people who already have lots of invested or are FatFIRED. If at anytime you need the cash, you can pull it out from your brokerage accounts. So why save the cash in a low savings account when your money can work for you.

What do I think of this?

As you know, I’m extremely conservative when it comes to money matters. When the FIRE community recommended three months of expenses, I had saved up to six months. With the pandemic, I’ve already beefed up my emergency fund up to eighteen months of expenses. And I’m not reducing it any time soon.

Mental peace

I cannot stress enough how peaceful it is to know that you can go on with your life as usual for eighteen months. Given the pandemic, this is even more highlighted when you speak with your friends. People all around are losing jobs or have experienced up to 35% pay cuts in salary. If you’re in management, the number is even higher.

Imagine even after pay cuts you don’t have to worry about your survival. More than that, imagine you don’t have to stress out about pulling out money from your brokerage accounts because you already have a dedicated fund for such situations.

Actual Emergency

It’s scary times, I’ll be honest. I’ve heard horror stories of hospitals over charging and COVID treatments going up to 800k INR per person. Usually, when one person in the family gets it, it quickly spreads. Insurance companies are also being dishonest. It’s better to not stress about your health and your family or hospital bills at such times. No one wants the added stress of actually having to work to pull out from brokerage during an emergency. Have a weekend in between and you never know how long it would take for the cash to actually hit your bank account. I’ve noticed even redeeming from mutual funds takes a lot longer. And I do not want to take my chances.

What do you think about it?