Do You Really Need an Emergency Fund?

An emergency fund is often times something that you don’t think about until it comes time where you need it. There are a number of items to save for including future goals such as retirement, a down payment on a home, or paying off debt. For this reason it is no surprise that an emergency fund can be pushed to the backburner. There are some cases where it is said that an emergency fund may not be necessary at all.

The answer to this question has a lot to do with your current situation in life. Determining your needs is the first step in analyzing your situation and determining if you really need an emergency fund after all.

Towards High Interest Consumer Debt

There is no closer emergency than the present day emergency of credit card debt. There is no sense in saving for a future emergency when you are paying high interest on your debt today. The rates that you will get from an emergency fund in a savings account or CD will not offset the interest you will be paying in interest on your credit cards.

If You Have No Retirement Savings

Retirement is an easy aspect of your personal finances to forget about, especially when you are young. In the decision between saving for an emergency now, and saving for your future, always chose the latter. The money put aside today in a Roth IRA or 401(k) will far exceed the growth that you will ever see in an emergency fund. Plus, certain retirement vehicles will allow you to borrow principal if you ever get into a situation where you need cash fast.

You Have No Debt and Low Expenses

In the case that you have managed to live debt free and below your means, you also may be in the category of someone who doesn’t necessarily need an emergency fund. Redirect your cash from emergency funds towards investments that offer long term returns. Reinvest your dividends until they grow to a substantial amount, at which time you can either retire or use the dividends in the case of an emergency to either live off of or subsidize your income.

Easily Accessible Investments

It just so may be the case that you have an emergency fund and don’t already realize it. If you have been investing heavily for the past few years, you may have already accumulated a sum that would more than cover you in the case of an emergency. As long as you can withdraw without penalty, you may very well be sitting on an emergency fund that is making money for you.

Regardless of where you are in life, having peace of mind is invaluable. Despite your current standing you should be constantly working towards having the ability to live on your own terms without having to be dependent on anybody else. In all cases, financial preparedness is key. Being alert to your financial situation allows you the ability take advantage of opportunities that come your way as well as protect yourself when you are met with misfortune. One size does not always fit all, especially when it comes to personal finance. Sometimes the best preparation is knowing what you don’t need to prepare for.

 

About Christopher

Comments

  1. One should always invest their emergency fund, always. “Investing” does not always equate “put at risk”. Sitting on $30K or whatever with that money not working for you is fairly bone-headed.

    Good tips.

  2. There seems to be an ongoing debate on this. To invest your emergency fund or not. I don’t wish to see my money lying around and not working for me hence I would invest on instruments that are of lower risk and high liquidity.

  3. I think there’s something to be said for the “sleep well at night” factor. To that end, I’m a proponent of emergency funds!

  4. The loss of dividends is the biggest element for us. That said, we do have very clear emergency plans to the best of our abilities.

  5. I don’t have as much in an emergency fund as most would recommend. I actually never have, I keep an active “street account” that is invested in growth accounts. In an emergency, I would tap those funds, even at a loss. In a serious emergency I could tap into retirement accounts, that would be a last resort but the funds are there if needed.

  6. Christopher, I do not agree with your points entirely, but your post does give me some things to think about. I think the best point you made was paying off credit card debt. I believe that it is possible to pay your cc debt down while building an emergency fund.

  7. Early on, an emergency fund is irreplaceable…but later on (40s, 50s, 60s) I think it’s ok to view your ROTH IRA as an emergency fund. (As long as the amount you need is a small percentage of your ROTH IRA Balance). Just my 2 cents

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