I know standard rules of thumb are that it is a good idea to have a liquid emergency fund of between of anywhere from 3-8 months of expenses (depending upon the source). How important is liquidity for such a fund? I recognize it makes sense to have at least some of it available immediately, but this seems like overkill to me. Since "liquid" is not a binary status, would it make more sense to have some sort of tiered or layered system where different amounts are stored at different liquidity levels (so some in a local bank, some in CDs, and some in even riskier, less liquid forms)? If this does make sense, what is a sensible structure for such a system, and if not, why?

Here are some related questions that do not directly answer my question: #1 and #2

EDIT: I did not intend for this question to be specific to my circumstances, but I might have implicitly done so without realizing it. I suppose the main reason for me thinking that having all the money completely liquid was overkill was because I was thinking the main purpose would be more along the lines of loss of income or other drastic changes in life circumstances. I was not thinking so much about major one-time expenses. I'm a single person who does not own his own home, and so with health, car, and renter's insurance, I imagine I personally don't need to worry much about those large, one-time expenses (although perhaps I'm wrong here).


7 Answers 7


Emergency funds, by the name it implies that they should be available on hand at a very short notice if needed. Conservation of principal (not withstanding inflation, but rather in absolute terms) is also a very important criteria of any kind of account that you will use to save the emergency fund. I would suggest the following breakup. The number in brackets signifies the amount of per month expenses that you can keep in that account.

  • Cash (1) (Since, even though ATMs are present everywhere, you never know if you emergency is going to hit when the grid's down)
  • High yield savings account (2)
  • High yield CDs which are insured by the FDIC (3)

= total 6 months living expenses

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    If CD's be careful that you can get your money out without any fees. If you need the money NOW you don't want to have to pay 10% to get it right away
    – Zachary K
    Apr 18, 2011 at 6:30
  • @ZacharyK - CD penalties are usually a tiny amount, 3 months interest for a year CD. Not enough to worry about ($10K CD, no more than $25 fee with today's rates). Sep 13, 2013 at 18:57

What you're describing makes sense. I'd probably call the non-liquid portion something besides my "emergency fund", but that's semantics mostly. If you have 3 months of "very liquid" cash in this emergency fund and you're comfortable that this amount is good for your situation, then I don't see why you can't have additional savings in more or less liquid vehicles.

Whatever you set up, you'll want to think about how to tap it when you need it.

You might have a CD ladder with one maturing every three months. That would give you access to these funds after your liquid funds dry up. (Or for a small/short term emergency, you'll be able to replenish the liquid fund with the next-maturing CD.)

Or set up a T Bill ladder with the same structure. This might provide you with a tax advantage.


IMO, you can do whatever you want with an emergency fund, as long as it is in a deposit-type account. The purpose of the fund is for emergencies, not to make money, so you want it to be liquid so that you can access it in an emergency. Personally, I'm willing to take accept a potential penalty for withdrawing. Here's some examples of what I mean:

  • Savings Accounts and other FDIC insured deposit accounts
  • CD's, as long as there is no principal penalty for withdrawing money early. (cashing out early will cost you interest though)
  • US Savings Bonds (there is an interest penalty for cashing the bond within the first 60 months)
  • Cash

You don't want "emergency" funds in a marketable security, because your emergency could be directly or indirectly related to some sort of market crisis. If you absolutely needed to liquidate an investment in the days after the collapse of Lehman brothers, you probably would have taken a bath -- even secure, US State bonds fell in value.

If you feel that this is taking too much cash off the table, that's ok, just don't consider the part that you invest part of your "emergency" fund. The 3-8 months of expenses thing depends on your situation. If you're a salesman, err towards 8. If you're a unionized civil service worker with seniority, 3 months is probably appropriate.


Duffbeer703 covers most everything. The entire point of an emergency fund IS for it to be liquid.

Now I do understand (if you feel your situation requires over 6 months of living expenses): That is a lot of money to have sitting in a statement savings account! Under no circumstances should you take any sort of risk with an emergency fund. However, you COULD do this: Invest some of the assets in a six month, 1 year or 2 year CD if returns were enough to be worthwhile.

If you don't need the money, then fine, great. But if you do, you can break a Certificate of Deposit before maturity. There will be a penalty fee. You might lose interest too. But you'll have access to your money, no liquidity risk. So maybe you could put most, say 60% of your rainy day funds in truly liquid assets. The remainder could be in longer term CD's which you hopefully won't need because you'll be back to non rainy day living again.


I'd be concerned about using CDs (or other non-liquid source) for your emergency fund because you become likely to use debt instead of tapping your emergency fund because you are worried about penalties (which typically only affect interest). This mind set can make you loan the bank money at 1-2% (buy a cd) and borrow money from the bank at 18-25% (credit card). Don't create psychological barriers to using your emergency fund in a true emergency

Also, you recommend 3-8 months of expenses. The purpose of an emergency fund is to cover both a loss of income for 3-8 months, or a one time large expense (new roof, new sewer pipe to the house, etc.). A tiered solution solves the loss of income solution, but does not readily address the need for a one time, large emergency.

I'd keep all of your emergency fund liquid.

  • I suppose I implicitly was less concerned about the one time large expense. If something unexpected happens to my health or my car, that's why I have insurance. I don't own a home, so I don't presently need to worry about the new roof, etc. Am I missing other, major large one-time expenses? Apr 18, 2011 at 17:25
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    @Michael McGowan Lawsuits are probably the biggest chance of ruin that you have. Ordinary people can have a momentary lapse of judgment and end up with a court bill. Not super likely, but not unheard of.
    – Jeffrey
    Apr 18, 2011 at 18:40
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    @Michael McGowan: Complex insurance situations may result in delayed claims. I had an associate who was injured in an accident where he was rear-ended twice in a 2-3 minute interval. The second driver ran off, and the insurance company for the first car blamed everything on the hit and run. End result: litigation and hardly any insurance money for over a year. Home or rental insurers are notorious for holding onto claims to encourage a quick, lowball settlement. Another thing to consider is unemployment -- what happens if you get laid off and end up un- or under-employed for awhile? Apr 19, 2011 at 3:00
  • CDs are most certainly liquid ("the degree to which an asset or security can be quickly bought or sold in the market at a price reflecting its intrinsic value", and losing a fraction of interest doesn't make it illiquid. Besides, you'd tier them, so as to mitigate having to cash in all of them at once.)
    – RonJohn
    Jan 19, 2020 at 20:59
  • @RonJohn Good point. While they would not technically be illiquid, I believe people behave as though they are illiquid, making you more likely to access debt rather than your emergency fund. This is the psychology of avoiding a negative (interest penalty).
    – Alex B
    Feb 12, 2020 at 20:13

For maximum liquidity of an emergency fund, having demand deposits and fixed deposits would be the best, as they are the most liquid instruments around. If you invest in other higher yielding instruments they would be less liquid, so it's a tradeoff and you've got to decide for yourself what's best given your requirements.

  • Higher yielding instruments will be just as liquid, but they'll be more volatile, meaning that you might have to sell them when they're down.
    – RonJohn
    Jan 19, 2020 at 21:04

I don't see why it would be any harder to sell stocks or bonds than it is to sell a CD you may have. Not to mention for large one time expenditures you can usually cover these with a credit card. This gives you about a month to move money around to pay your credit card off in a timely manner without incurring a charge. I have had no problem getting a credit limit beyond 4-5 months of expenses for myself on a single card. I can't even think of a household emergency that you can't pay for with a credit card.

Job loss situations are not going to require large amounts of money immediately.

True catastrophic emergencies (natural disasters, ransoms) however will need fast cash potentially. However in this case the only thing that is good is having cash on hand. As you can't count on ATMs or Bank systems to be functional.

Even more serious emergencies such as zombies, the end of world, or anything that involves total economic collapse would require things that are not cash. You would need to invest in things like supplies, shelter, guns and maybe shiny metals that may have value.

  • "You can't count on ATMs" - An interesting point. And one that prompts the question of what kind of emergency. A job loss might require 6 months of spending money. Surly that doesn't need to be in cash, nor is it what you're referencing. It seems to me you are thinking of a natural disaster where power is out, no ATMs, but cash would help. Sep 13, 2013 at 17:52
  • Something I have been considering lately. I have just started to move more money out to investments which I used to consider my long term emergency fund or anything more than 4-6 months expenses. Everything else for the short term is in a rewards checking account @ %2.5. To have a truly safe EF, you would need to diversify it just as an investment, some in a checking account, some in cash under the bed, some in cash buried in the yard in case the house burns down, etc... I don't do this, but it all depends on what you consider a possible emergency I suppose.
    – radix07
    Sep 13, 2013 at 18:14
  • While I agree with most of what you write, "Job loss situations are not going to require large amounts of money immediately" misses the fact that you are more likely to lose your job during a recession when the market is down. (Think of all the people who lost their jobs in 2007-2009.)
    – RonJohn
    Jan 19, 2020 at 21:03

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