What should I reserve “emergency savings” for?
Emergency funds are good to keep yourself out of debt, for whatever reason. Job loss is a big place where an emergency fund can help you out.  It buys you time to find another job before hauling out the credit cards for your groceries, falling behind on your mortgage and car payments, etc. But it can just as easily be used for major car repairs, serious medical issues, home repairs, etc. ... anything that needs to be done quickly, and isn't a discretionary item. The bigger your cash reserves, the better, especially now that the economy is bad. "I think it is stated perfectly in the question, ""unforeseen critical needs."" You know you will need to buy new tires for your car, they are critical but not unforeseen. However, if a tree falls on your car and you need to pay the insurance deductible for the repairs it would be unforeseen. You should budget for the expenses you can plan for in advance like car maintenance and repairs. An emergency fund is for items that are out of the ordinary."
No cash is necessary for most people.  In the modern day in the US there is no need to keep paper currency around for emergencies; any sort of emergency that knocked out all of the ability to use plastic (ATMs, credit cards, etc.) for an extended period of time AND knocked your bank out of service would be of the level that cash  might not have any value either. Your $100 of cash for natural disasters is likely more than enough, and even that I wouldn't necessarily consider a vital thing in this day where even a major natural disaster probably isn't going to have too much impact on the financial sector outside of the immediate area (that you should be exiting quickly).  Keep however much cash around that you need for day to day cash expenses, and that should be enough. The level of emergency that would suggest cash being needed would probably need more than you'd actually want to keep around, anyway - i.e., a complete collapse of the American or World financial system would imply you need months' worth of cash.  That's just not feasible, nor is it practical financially.  You should have your emergency fund making at least a bit of interest - 1% or so isn't hard to get right now, and in the near future that may increase substantially if interest rates go up. It also would make you a substantial theft target if it were known you had months' worth of cash around the house (i.e., thousands of dollars).  Safes don't necessarily give you sufficient protection unless you've got a very good safe - commercial ones are only as safe as the ability to crack them and/or transport them is. Now, if you find yourself regularly out at 2am and run out of cash, and you live somewhere that ATMs don't exist, and you find yourself needing to pay cab drivers from time to time after a drunk bender... then I'd keep at least one cab's worth of cash at home. "I think the real problem here is dealing with the variable income. The envelope solution suggests the problem is that your brother doesn't have the discipline to avoid spending all his money immediately, but maybe that's not it. Maybe he could regulate his expenses just fine, but with such a variable income, he can't settle into a ""normal"" spending pattern. Without any savings, any budget would have to be based on the worst possible income for a month. This isn't a great: it means a poor quality of life. And what do you do with the extra money in the better-than-worst months? While it's easy to say ""plan for the worst, then when it's better, save that money"", that's just not going to happen. No one will want to live at their worst-case standard of living all the time. Someone would have to be a real miser to have the discipline to not use that extra money for something. You can say to save it for emergencies or unexpected events, but there's always a way to rationalize spending it. ""I'm a musician, so this new guitar is a necessary business expense!"" Or maybe the car is broken. Surely this is a necessary expense! But, do you buy a $1000 car or a $20000 car? There's always a way to rationalize what's necessary, but it doesn't change financial reality. With a highly variable income, he will need some cash saved up to fill in the bad months, which is replenished in the good months. For success, you need a reasonable plan for making that happen: one that includes provisions for spending it other than ""please try not to spend it"". I would suggest tracking income accurately for several months. Then you will have a real number (not a guess) of what an average month is. Then, you can budget on that. You will also have real numbers that allow you to calculate how long the bad stretches are, and thus determine how much cash reserve is necessary to make the odds of going broke in a bad period unlikely. Having that, you can make a budget based on average income, which should have some allowance for enjoying life. Of course initially the cash reserve doesn't exist, but knowing exactly what will happen when it does provides a good motivation for building the reserve rather than spending it today. Knowing that the budget includes rules for spending the reserves reduces the incentive to cheat. Of course, the eventual budget should also include provisions for long term savings for retirement, medical expenses, car maintenance, etc. You can do the envelope thing if that's helpful. The point here is to solve the problem of the variable income, so you can have an average income that doesn't result in a budget that delivers a soul crushing decrease in quality of living." The latter. Simply because having some savings is always better than having no savings. Using a credit card in an emergency will always be an option (as long as you are paying off debt) but using savings earmarked for emergencies is better. With $800/month extra?  Do both. (I am ethnocentric enough to assume you live in the same country as me) First, figure out what your emergency fund should look like.  Put this money in a high yield checking or savings account.  Add to it monthly until you reach your goal.  It should be 3 to 6 months of your total monthly expenses.  It will be a lot more than $2k I suspect.  You will earn bubkis in interest, but the point of the emergency fund is a highly liquid asset for emergencies so you can choose cheaper car insurance and not buy warranties on stuff. With your $800/month, split it up this way: $416/month into a Roth IRA account at Vanguard (or Schwab or Fidelity) in the Star Fund (or similar low cost, diversified fund).  The star is $1000 to open, pretty diversified.  $416 is a lazy number that comes close to the $5000 annual limit for a Roth IRA in the US.  Contribute like clockwork, directly from your paycheck if you can.  This will make it easy to do and get you the benefit of dollar cost averaging. $200 or $300 into your savings account until you reach your emergency fund goal. $85 - $100.  Live a little.  Speculate in stocks with your vanguard account.  Or rent fancy cars.  Or taken a vacation or go party.  If you are saving $800/month in your early 20 be proud of yourself, but have a little fun too so you can let off steam.  It isn't much but you know you can play with it. Once you reach your emergency fund, save up for your future house or car or plane tickets to Paris.  Ask another question for how to save up for these kinds of goals. "These good rates all tend to be ""on up to $X"" where X is some low'ish number that could require multiple accounts. They often also come with other strings, like set up automatic deposits/withdrawals, and use debit card at least 15 times per month. The two you mention have these flaws, whether or not it's worth it depends on if you are happy to meet those requirements and how big your emergency fund is.  Personally, I'd rather get rewards on a credit card than use a debit card, and I don't want to open a bunch of accounts, so I have a boring savings account with a pretty low interest rate for my emergency fund. It's liquid, earns some interest, and I don't have to think about it." "The guideline for the size of an emergency fund is just a guideline.  I've usually heard it expressed as ""3 to 6 months,"" but everyone has a different idea of exactly how big it should be. The purpose of the fund is to give you enough cash to be able to pay for unexpected expenses that have come up that you have not budgeted for without you having to borrow money to pay for them. To figure out how big this fund should be, we look at the worst case scenario.  Suppose that you lost your job tomorrow.  What would you do? Cut your expenses.  You'd probably be much more careful how you spend money. Secure health insurance.  This would be done by either continuing your employer's policy with COBRA, or by purchasing your own insurance, likely through the Obamacare/ACA market.  Keep in mind that most likely your employer is paying for a portion of your insurance now, so this expense will go up quite a bit no matter which option you choose. Look for another job.  You'd probably begin your search for a new job immediately. The size of your emergency fund determines how long you will be able to go without income before you need to start a new job. Regarding cutting your expenses, it is up to you how much you would cut.  There are things that are easy to cut temporarily (or permanently), such as restaurants, entertainment expenses, vacations, etc.  You would probably stop retirement investing until you have income again.  The more you cut, the longer your emergency fund would last.  Things you don't want to cut are necessities, like housing, groceries, utilities, transportation, etc.  I would also include health insurance in this list.  Certainly, if you have a pre-existing condition, you do not want to let your health insurance coverage lapse. Your employability is also a factor.  If you believe that you would have an easy time finding similar employment to what you have now, your emergency fund might not need to be quite as big as someone who believes they would have a harder time finding another job." The rule that I know is six months of income, stored in readily accessible savings (e.g. a savings or money market account).   Others have argued that it should be six months of expenses, which is of course easier to achieve.  I would recommend against that, partially because it is easier to achieve.  The other issue is that people are more prone to underestimate their expenses than their income.  Finally, if you base it on your current expenses, then budget for savings and have money left over, you often increase your expenses.  Sometimes obviously (e.g. a new car) and sometimes not (e.g. more restaurants or clubs).  Income increases are rarer and easier to see.   Either way, you can make that six months shorter or longer.  Six months is both feasible and capable of handling difficult emergencies.  Six years wouldn't be feasible.  One month wouldn't get you through a major emergency.   Examples of emergencies:   Your savings can be in any of multiple forms.  For example, someone was talking about buying real estate and renting it.  That's a form of savings, but it can be difficult to do withdrawals.  Stocks and bonds are better, but what if your emergency happens when the market is down?  Part of how emergency funds operate is that they are readily accessible.   Another issue is that a main goal of savings is to cover retirement.  So people put them in tax privileged retirement accounts.  The downside of that is that the money is not then available for emergencies without paying penalties.  You get benefits from retirement accounts but that's in exchange for limitations.   It's much easier to spend money than to save it.  There are many options and the world makes it easy to do.  Emergency funds make people really think about that portion of savings.  And thinking about saving before spending helps avoid situations where you shortchange savings.   Let's pretend that retirement accounts don't exist (perhaps they don't in your country).  Your savings is some mix of stocks and bonds.  You have a mortgaged house.  You've budgeted enough into stocks and bonds to cover retirement.  Now you have a major emergency.   As I understand your proposal, you would then take that money out of the stocks and bonds for retirement.  But then you no longer have enough for retirement.  Going forward, you will have to scrimp to get back on track.   An emergency fund says that you should do that scrimping early.  Because if you're used to spending any level of money, cutting that is painful.  But if you've only ever spent a certain level, not increasing it is much easier.  The longer you delay optional expenses, the less important they seem.   Scrimping beforehand also helps avoid the situation where the emergency happens at the end of your career.  It's one thing to scrimp for fifteen years at fifty.  What's your plan if you would have an emergency at sixty-five?  Or later?  Then you're reducing your living standard at retirement.   Now, maybe you save more than necessary.  It's not unknown.  But it's not typical either.  It is far more common to encounter someone who isn't saving enough than too much. "The concept of emergency fund is a matter of opinion. I can tell you the consensus is that one should have 6-9 months worth of expenses kept as liquid cash. This is meant to cover literally all bills that you might encounter during that time.  That's a lot of money. There are levels of savings that are shy of this but still responsible. Not enough to cover too much in case of job loss, but enough to cover the busted transmission, the broken water heater, etc. this is still more than many people have saved up, but it's a worthy goal.  The doctor visit is probably the lowest level. Even without insurance, the clinic visit should be under $200, and this shouldn't cause you to have to carry that amount beyond the time the bill comes in.  The point that shouldn't be ignored is that if you owe money at 18% on a credit card, the emergency fund is costing you money, and is a bit misguided. I'd send every cent I could to the highest rate card and not have more than a few hundred $$ liquid until the cards were at zero.  Last - $5K, $10K in the emergency account is great, unless you are foregoing matched 401(k) dollars to do it. All just my opinion. Others here whom I respect might disagree with parts of my answer, and they'd be right.   Edit - Regarding the 'consensus 6-9 months' I suggest -  From Investopedia - ""...using the conservative recommendation to sock away eight months’   worth of living expenses...."" The article strongly support my range for the fact that it both cites consensus, yet disagrees with it.  From Money Under 30 The more difficult you rank your ability to find a new job, the more   we suggest you save — up to a year’s worth of expenses if you think   your income would be very difficult to replace. From Bank of America   I have no issue with those comfortable with less. A dual income couple who is saving 30% of their income may very well survive one person losing a job with no need to tap savings, and any 'emergency' expense can come from next month's income. That couple may just need this month's bills in their checking account." Firstly well done on building a really sold base of savings. An emergency fund needs to have two key characteristics: Be enough to get you through a typical emergency event (often seen as approx. ~6 months’ salary in your style of situation assuming you have no dependents etc) Be liquid and available to you instantly if an emergency arises Once you have decided how much you will need for 1), you then generally find the best interest available on an instant access savings account and leave it there. It's important to note that because you need it very liquid and very secure you will basically never make (nor should  you expect to make) any sizeable rate of interest on your emergency fund. Once this is done, whatever left should be invested in an asset/mix of assets that best fit your risk profile - of which long term bonds are a completely legitimate option, but it's hard to say without knowing more about your long term aims/liabilities/job market etc. It depends on how immediately you think you'll need your emergency fund cash: If you anticipate running into problems where you need cash right away (e.g. you live paycheck to paycheck, and your car breaks down a lot), put it into a checking or money market account. If you don't think your emergencies will require immediate access to cash (e.g. unemployment), then put it in a savings account or CD. If there is a lot of money in your accounts that goes unused, and you want a bigger safety net, then consider investing it. Though it's generally a better idea to pay off debts at this point. I think the best idea is to split your emergency fund between your checking and savings. Maybe 20% checking and 80% savings. That way, you have some extra cash on hand when you need it, while most of your money is growing in savings. 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. = total 6 months living expenses There is no right answer here, one has to make the choice himself. Its best to have an emergency fund before you start to commit funds to other reasons. The plan looks good. Keep following it and revise the plan often. "The purpose of the emergency fund is to enable you to pay for unplanned necessary expenses without going into debt.  You know that cars don't last forever and eventually need to be replaced. Ideally, you would have a ""car replacement fund"" which you contribute to a little every month. (Essentially, it is a car payment to yourself.)  Then when it comes time to get a replacement car, you have money set aside for this purpose and know exactly how much you can spend.  However, in your case it seems that you don't have enough money in your car replacement fund for the car that you want.  There are a few different causes that might have led to this situation: Due to unforeseen circumstances, you need a replacement car before you thought you would need it.  You find that your planning was not quite right, and you weren't saving as much as you need.  You are trying to buy a more expensive car than you need.  If a replacement car is a necessity, two of these are emergencies, one is not.  If you don't have enough cash set aside for a car, it is certainly better to spend your emergency fund and pay cash than to borrow money to buy the car. Only you can decide if the car you are looking at is appropriate for you, or if you should be looking at a less expensive car. After you purchase the car, build your emergency fund back up first, then start saving for your next car." "Goodness, I wish I could put away half my paycheck. Not to rain on your parade, but a 6-month emergency fund is not quite ""very good.""  It is the typical starting time frame.  Personally, I would feel more comfortable with a 2+ year fund.  That is a bit extreme, but only because many of us can barely seem to make it around to a 6-month fund.  So, we focus on the more attainable goal. I say you do all three.  Make saving money your priority, but do enjoy some of it; in moderation.  Do not plan on making any big purchases with it, but know that you will eventually be able able to do so.  Money not spent is worthless Idle money is worthless.  Make some -- hopefully -- prudent investments with some of your money.   A small portion of that investment portfolio can/should be in speculative investments.  Maybe even as much as 20% of your investment portfolio, since you are young.  Consider that money gone and you will hopefully be surprised by one of those speculative investments.  That is the crucial point: earmark a small portion of your investment portfolio which you are willing to lose.  However, do not gamble with it.  Research the hot emerging technologies, for example, and find a way to make an investment. So, in summary: You may have more money that you know what do with, right now.  However, that does not mean you need to go out and spend it all.  Trust me, as you get older you will think of plenty of good uses for that money." I do understand what a creditor and equity holder is. I'm just saying my teacher NEVER brought up ponzi schemes and tied it to anything related to our accounting. He didn't think it was worth his time to go into details how ponzi schemes break accounting principles.  I also posted the question in finance as my finance courses dealt with financing money... And banks...