It’s An Emergency!! Do you really need an Emergency Fund?

And How Much Do You Put In It?

If you hire a financial advisor, they will likely ask you if you have an emergency fund. This is a lump sum of completely liquid money, meaning you can access it easily and quickly. The money that you would typically save in a savings account.

The Credit Card

“Do I really need all that money sitting in a savings account?”

After all, you have a credit card that has a $15,000 credit line. If you read my Debt Disasters article, you will know the average interest rate on a credit card is 19%!

Let’s say you own a home, or more accurately; the home owns you. Your boiler breaks down and needs to be replaced. Boom! That’s at least a $9,000 bill that’s completely unexpected. Trusty credit card to the rescue! You make a plan to pay off $500 a month, thinking, “I’ll have it paid off in 18 months. That’s not so bad.” That’s not the whole story, though. You have to take into account the interest rate. It’s going to take you four more months to pay it off. It will cost you $1677 in interest for the privilege of using the credit card.

(If you already are in this scenario, you may benefit from signing up for an interest-free credit card and transferring the balance. Some offer interest-free payments for up to 24 months. Pay it off before the time allotted, save for an emergency, and don’t get caught in this scenario again.)

Instead, let’s say you have been saving $500/month for one year and ten months and have it in a Betterment High yield savings account earning 2% interest(Click here for current interest rate). You have saved $11,200 ($200 from interest earned). The boiler breaks down. You pay the $9000 out of your emergency fund and continue to put $500/month in. In 1 year and ten months, you’ll now have $13,891 and have earned another $300 in interest

In the first scenario, you are paying $1677 to a credit card company; in the next, you have earned $500 of interest. The second scenario allows for other significant things to happen because you still have a reserve, such as an unexpected Radon Remediation System, which costs $1200. This recently happened to me. I highly recommend the Radon Eye to anyone interested in having a continuous radon monitor. In the first scenario, another unexpected expense could be catastrophic. When holding credit card balances, you can see how someone would spiral into a debt disaster.

The Retirement Account

Do Good, I have x amount in a retirement account. Can I take a loan against that? Yes, you can, but I would avoid this at all costs. In this scenario, you pay interest and fees against your money. The interest rates are lower than credit cards, but you also have the risk of borrowing during a bull market. Meaning you could miss out on some serious growth of that money! Leave your retirement money alone.

The Personal Loan

A personal loan is another option. The lowest rate I found was on Sofi for 8%. I don’t recommend this option over having an emergency fund, but it may be viable when trying to get out of extreme credit card interest rates. Use the strategies in the debt disaster article to pay it off and get your emergency fund started!

How Much To Put In Your Emergency Fund

When I read about an emergency fund ten years ago, the going rate was to save three months of your salary. I’m not sure if it was covid that shifted the minds of the financial world, but I have been seeing six and even 12 months of salary. Personally, I think that is excessive.

Individual circumstances should determine the amount you need in an emergency fund. First, ask yourself a few critical questions.

  1. How stable is my Job? Is it likely recession-proof?
  2. Does my income fluctuate with my performance?
  3. What is my lifestyle like?
  4. If I lost my job, what would be the minimum income I would have to earn to maintain my lifestyle?
  5. Do I have a lot of payments I make on debt per month?

Looking at my own situation.

  • I have a very stable job that is easily transferrable to all 50 states in the US.
  • I work in healthcare, in an operating room; aside from purely cosmetic surgery, the rate of people needing surgery does not decrease during a recession. Therefore, I consider my job highly recession-proof. Mrs. Do Good also works in a recession-proof healthcare job.
  • My income does not fluctuate with performance but may fluctuate with my work hours.
  • My lifestyle is relatively simple. I don’t have hobbies that require significant recurring expenses (golf comes to mind). I also don’t have any recreational vehicles like an RV. I get rich owning a tent instead. I like to ride bikes, walk on trails, and find peace doing mundane tasks like yard work. Sometimes I have one-time expenses, like travel, but those are easily stopped if needed.
  • I have children, but their expenses are insignificant and wouldn’t change how I manage my emergency fund.
  • Aside from a mortgage, I don’t have any debt. I have two cars that are paid off, and I will keep those for a very long time. School loans are all paid off—zero credit card debt. Instead, I make around $2000/year from cash-back rewards.

Taking this all into consideration. I don’t need to have 12 or even six months of living. If my wife or I get hurt, the other can still work. Our lifestyle could easily be modified so that one income could cover our expenses. We wouldn’t be investing as much as we do, if any, but we wouldn’t be struggling by any means. For long-term health problems, disability insurance would kick in, which is paid for by my job. I wouldn’t anticipate needing my emergency fund to live and instead need it for unexpected expenses. No doubt, the unexpected does and will happen. To name a few, in the last decade, I have had a well go dry ($9000), a dog get tongue cancer ($5000), a septic pump fail ($2500), and a radon issue ($1200). I’m sure there is more I can’t recall off the top of my head.

Ten years ago, I settled on an emergency fund of $20,000, and it has stayed that amount even today, which is even well below the three months of income suggestion. That’s more than enough to cover any significant issue that life throws at me. Even a few problems happen at once. If I have to tap into the fund, I can funnel money away from investing and into the emergency fund until I reach my threshold again.

Of course, if your job is based on performance and a specific market, like a real estate agent, you may want to take a different approach. For one, I wouldn’t base your lifestyle on a few good years of sales. Instead, take a 10-year average and assume you will make no more than that average (or even go below the average for an extra buffer). You can save the rest to your desired emergency threshold and start investing if your lifestyle is already below what you usually make; you won’t have to worry when you have a terrible year of sales. Your life should stay status quo minus the extra investments you have made in a good market.

Why Not Just Save 6-12 Months, Just In Case? What’s The Harm?

There’s certainly no harm in having 6-12 months for an emergency fund. The downside is the potential loss of returns.

Suppose you make $100,000/year and save six months’ worth of income instead of 3 months of income. Ignoring the time it took you to accrue the $50,000. A 2% high-yield savings account with betterment would earn nearly $25,000 in interest over 20 years. Not bad. However, if you instead put three months of income in a savings account and the other three months you invest in the S&P500, which has averaged a 10 percent historical return. Your interest from the savings account would be $12,148, and from the investment account would be $143,187. Totaling a return of $155,335!

It makes more sense to me to have this money invested. What do you think? What rule do you think is the best for an emergency fund? Let me know in the comments.

Thanks for reading. I am truly humbled. I would love to hear from you in the comments if you have questions or anything to add!

If you want your finances presented as a case study on this site, you can just click the contact button up top and leave me a message. I’m looking for people to share their budgets, good and bad, and I’ll analyze how they could improve or present them as a positive example for the masses. No personal details will be shown on the site. Instead, write “Do Good Budget” in the subject because I get many spam emails.

Leave a comment and let me know how much you like to keep in your emergency fund.

(Disclaimer: Some links in this article may pay me a small commission after a purchase. I recommend products I have used and enjoy. The small amount I get from this helps me maintain this site and keep this blog going. Thank you.)

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