Does Everyone Need and Emergency Fund?

An emergency fund is often times something that you don’t think about until it comes time that 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 side. There are some cases where it is said that an emergency fund may not be necessary at all.

So, does everyone need an emergency fund? 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 opportunites 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.

9 thoughts on “Does Everyone Need and Emergency Fund?

  1. There are different levels of emergencies. A smallish cost may be say up to a month’s salary (after tax) which can often be covered by monthly income, or in some way delaying paying it for a week or so, so that you don’t go overdrawn at the bank. For a larger amount, perhaps up to a year’s salary after tax, you may choose to use a bank loan or even a credit card as long as you pay that down asap (even with a subsequent bank loan). A large one – up to say 10 year’s salary is a serious matter that is hopefully very rare and will depend on your resources.

    I am against tying up too much money ‘just in case’. You are better putting that into a semi-liquid investment account, particularly if it is tax efficient.

  2. I think an emergency fund is good to have if money is an major issue. It’s always good to have something for an emergency but if you keep your money in places that are accessible fairly quickly then I think you are on the right track. A couple dollars in the safe. Some in the bank. The rest invest.

  3. I think just about everyone should have SOME form of emergency fund. It doesn’t have to be the oft quoted 6 months of expenses, but having some cash set aside for unexpected expenses is never a bad idea. An emergency fund doesn’t have to be an either/or type of thing either. There’s no reason why you can’t save a bit up for “just in case” while paying off other debts or investing for the longer term as well.

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