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.
Also published on Medium.