Emergency Fund: Is It for You? – Guest Post
You have probably heard three main things about emergency funds:
1. It’s important.
2. Have one.
3. Start now.
However, some people have disagreed about the importance of an emergency fund (EF). In the traditional sense of the term, that is.
A traditional emergency fund, which here we will define as 3-6 months worth of expenses stored in a savings account, has been generally recommended for a several good reasons:
• A great deal of Americans live paycheck to paycheck, without any financial cushion to speak of when an emergency strikes, putting them in the precarious position of going deeper into debt when an unexpected expense crops up.
• A savings account is a liquid asset, enabling the account holder to access it immediately when needed.
• Building up an emergency fund helps build the financial discipline needed to implement other sound financial principles.
• Having a store of cash readily accessible provides peace of mind.
Now, these are all valid reasons, and nearly everyone would agree that they make sense. However, some personal finance bloggers take issue with the traditional approach.
Jeremy on ModestMoney, for example, acknowledges that the traditional EF is beneficial for people with debt because it prevents them from getting in further, but argues that if you have good credit and financial discipline, it’s smarter to have a smaller stash of cash and put the rest of the money into investments with higher rates of return than even “high-interest” savings accounts. Furthermore, he points out that if the rate of interest in your savings account is less than the rate of inflation, your money is essentially shrinking in value over time, and it’s better to put your money to work in more productive investments rather than letting it sit there and depreciate in value.
The blogger behind TwentySomethingMoney takes a similar approach with his emergency plan that constitutes using his $10,000 limit credit card to tide him over until he can liquidate some of his TSFA (tax free savings account), one of his savings accounts for the stock market.
On the other hand, Alina J on Timeless Finance disagrees with the traditional emergency fund approach for a different reason — she doesn’t believe that 3-6 months’ worth of funds is anywhere near enough, and people should not reach that benchmark and then stop, feeling secure. Conversely, she believes that the amount of savings you’ll need will fluctuate at any given time based on circumstances, and sometimes you can get away with saving less, but ultimately, you should never stop saving.
These bloggers may disagree with the traditional emergency fund because of where the money is stored and how much is recommended for it, but notice that they embrace the concept of an emergency fund in one essential way — they all advocate for some kind of financial plan to cover emergencies, be it in a savings account or otherwise. So, while it may be all right based on your personal situation to not have a traditional emergency fund, it’s NOT okay to be without a viable plan to cover emergency expenses.
Got that? No plan = no no. While the traditional approach to an emergency fund is a viable one, it may not be the best one for you. Make an emergency plan that suits your circumstances and personal preference and stick to it.
So, to answer the question posed in the title of this post—is an emergency fund for you? Maybe. Should you have an emergency plan? Most definitely.
Alex Watson is a freelance writer on behalf of GoldMax, one of the most respected cash for gold companies in the nation.