Should Building Up Your Emergency Fund be Top Priority?

Home » Money Management » Should Building Up Your Emergency Fund be Top Priority?

Should Building Up Your Emergency Fund be Top Priority?

It seems like common sense that, in addition to your various savings and investments accounts, you set aside money specifically for use in the case of an emergency. Most commonly people think of these funds as a safety net should they or their partner become unemployed. While most financial advisers can agree that an emergency fund is a necessity, there are some differences in the details, such as how much you should have on hand and what you should prioritize when building up your reserve.

In this infographic from Two Cents, they recommend having enough money to cover three to six months’ worth of expenses on hand and that this should be your first priority above everything else. Similarly, Suze Orman controversially announced that she also thought building your emergency fund was job one saying, “If you have an unpaid credit card balance [and] not much saved up in emergency savings, I need you to listen up. My advice has changed. I want you to only pay the minimum due on your credit card balance, and instead, make it your top priority to build as much of an emergency cash fund as you can.” Additionally, Orman advises that your emergency fund be able to cover expenses for eight months — a realistic amount of time it could take an unemployed worker to secure a new job.

On the other hand, some say that having six months’ worth of funds saved up is excessive. Additionally, these voices argue that such money could be put to better use as an investment instead of hiding under your mattress. Two Cents spoke to Andrew from the site Living Rich Cheaply about the matter and Andrew’s conclusion was, “While you should probably keep some money in a safe place, such as a savings account, six months living expenses seems a bit excessive. I’d prefer to have more of my money invested in a mix of stocks and bonds.”

Given this conflicting advice the reality is the amount you keep on hand varies depending on your situation. For example, if you have no debt, are well insured, and have multiple incomes in your household, keeping less of a reserve of hand for emergencies may be perfectly reasonable. For those people maximizing their investments now and selling some of their stocks or tapping into their home’s equity in order to get by temporarily if trouble hits makes sense. The odds of a disaster striking compared to the likelihood of missed income from excessively conservative saving is a risk worth taking.

On the other hand if your job isn’t secure, you have health issues, or you have high fixed monthly expenses, then having a minimum of six months savings makes sense. You may lose some investment income but that is far better than losing everything to a bout of extended unemployment or a long term hospital stay.

While there’s no clear consensus when it comes to emergency funds, the truth is that you should have some savings to fall back on should hard times hit. How much you keep on hand, how you prioritize saving it, and how to you access it will depend on your personal financial situation and what cutbacks you’d be able to make in order to weather any financial storms. Ultimately having an emergency fund of some sort is a must; like they say, hope for the best and plan for the worst.

Comments

Leave a Reply Cancel reply

Your email address will not be published. Required fields are marked *

Author

Jonathan Dyer

I'm a small town guy living in Los Angeles looking to make solid financial decisions. I write for a number of finance websites, including HuffingtonPost and Business2Community. I founded DyerNews.com in 2015 to focus on personal finance and the emerging FinTech markets.

Other Articles by Jonathan Dyer

Delta Announces Major Profit-Sharing Bonuses for Employees

As the United States economy has continued to expand and executive compensation has expanded with it, income inequality has become a more high-profile topic. While that's partially because of the latest election cycle and the controversial 2017 tax bill, grassroots minimum wage hike efforts and the like have also played...

Chainalysis Suggests $2.8 Billion in Bitcoin Was Laundered Last Year

For as much mainstream success and acceptance as Bitcoin and other cryptocurrencies have enjoyed in recent years, there are still those who remain skeptical of digital currency. In addition to those who criticize crypto for not having any "real value," regulators have repeatedly pointed to the ability to "launder" funds...

Chime, Robinhood Top FinTech VC Investments in Q4 2019

Looking back at 2019, it's fair to say that it was a pretty good year for FinTech. From startups launching new products to major acquisitions being announced, there was plenty of news to keep up on. Of course 2019 was also a big year for investments. In fact, the latest...