Today’s question comes from a reader on the West Coast. She’s wondering about having an Emergency Fund – and whether everyone really needs to put aside 3-6 months of expenses. I love this question and, as you will see, had a LOT to say on the subject!
I’m new to your blog… and fortunately not in debt apart from our (rather large) mortgage. My husband and I earn a comfortable income and have very secure jobs. We set aside retirement and some college savings each month (though not enough).
Given all that, do we still need an emergency fund if we really are not in danger of losing our jobs?
In our situation, what is wrong with considering our credit cards to BE our emergency fund?
Congrats on doing so well financially – that is wonderful! Having a secure job, epsecially in this economy, probably feels like such a blessing.
Given that blessing, I would challenge you to really start paying close attention to what you do with your money, so that you can achieve even greater successes financially.
If you and your husband aren’t yet on a written budget, that would be my first suggestion. I know you didn’t ask about this, but I am reading between the lines!
Getting on a budget may lead you to suddenly realize that you have plenty of money to not only fully fund retirement and college, but also to build that emergenecy fund – although not necessarily in that order.
By the way, the reason I have found a written budget to be so helpful is that it prevents all the little money “leaks”. The coffees at Starbucks, the impulse buys at the grocery store, the new pair of shoes you forgot to account for… With a written budget, those leaks have no where to hide, so you can stop them up – and start spending your money more intentionally. (I’m not saying, by the way, ‘Don’t buy shoes’ – I’m saying, ‘Be intentional about buying shoes!’)
As to the Emergency Fund question: In a word, YES. I think everyone should have one.
Before we got our financial lives under control, I really couldn’t imagine having an emergency fund. I couldn’t imagine having enough money left over to save up for one.
I truthfully couldn’t envision what it would be like to have $100 in the bank – let alone $1,000… LET ALONE $10,000 or more.
But having walked through that and come out the other side, let me tell you that building our emergency fund is the most important thing we have done – or will do! – for our finances EVER.
By having that CASH in the BANK, we have security. We have peace of mind.
The amount of the Emergency Fund will vary from family to family. Maybe you don’t need to worry as much as we do (since we’re both self-employed) about job loss or income drops. So, perhaps you don’t “need” 6 months of expenses in your emergency fund.
But job insecurity isn’t the only “emergency” that can befall a family. There are unforseen house repairs, and car repairs, and medical bills, and sick parents, and sick children, and truly a million other things that aren’t budgeted for regularly, but NEED to be dealt with immediately.
When we don’t have an emergency fund – or a rainy day fund, or a life-happens-fund – then how do we pay for that stuff the inevitably comes up?
For most people, the answer is probably: Put it on the credit card.
And you know what happens when we do that? The emergency turns into a crisis. Because now we don’t only have the emotional stuff to deal with, we’ve got the money stuff to deal with too.
We have credit card bills, without the money to cover them – which means interest and late fees… and suddenly that emergency is taking a far greater toll than it needs to.
One of the things I love most about having an Emergency Fund is that it allows me to focus on the issue at hand – and not get all tied up in knots over the money part of it. I am clearer headed with an Emergency Fund. I am able to respond from my loving heart, and not my panicking brain.
Now, I can’t tell you how much money that fund needs to be. Is $10,000 enough? $20,000? $50,000? Is there any amount of money that will insulate us from all of life’s calamities?
Certainly not. But there is an amount – and only you and your husband can determine that – that will give you PEACE of mind, while still allowing you to do other smart things with your money.
In other words, if your ‘peace of mind number’ is $50K (which it doesn’t sound like it is, but just for example sake), but it will take 6 years to save that – during which you won’t be able to do anything else with your money, then that’s probably too much.
But if you can save $20K in a year, then yes, I think it’s worth it to hold off on other financial goals for that year to gain that LIFETIME of peace.
The emotional and financial benefits of an Emergency Fund are innumerable. And, in my opinion, no matter how secure your jobs or high your income, those benefits can never be matched by revolving credit.
Disclaimer: I am not a financial adviser, nor do I play one on this blog. This post should not be construed as legal or financial advise. I am merely relating my opinions about emergency funds based on my own personal experience.