When I first started out, I thought, “Why do I need an emergency fund?” I’d rather invest that money in stock and put it to work. If I really need money, I can use a credit card or sell the stock.
If all goes well, then I won’t need to use that money and I can make some profit from stock. However, I also need to look at the worse case scenario. Let’s say I need money to fix the car so I put the repair bill on the VISA card. Then stock is down so I lose money when I sell my shares. The result is: I can’t pay the credit card bill in full and need to carry the balance. A credit card balance is a slippery slope that we need to avoid.
Experts recommend having 3 to 6 months worth of living expenses in your emergency fund. I think 2 to 3 months is a good starting point for young people. If you are older and have more responsibilities, then it needs to be closer to 6 months in case you lose your job or are confronted by some other emergency. You can figure out how many months of living expense you should have covered for your situation, then bring out your handy budget sheet and you’ll have your target emergency $.
This emergency fund is for emergencies — hence, the word ‘emergency’ — and should be put in a separate saving account so it is easy to auto deposit and is accessible when you really need it. The target amount will look very daunting if you are just starting the emergency fund. You just need to start small and save away a bit every month and stick to it. Even $10 a week will be a good start.
I must confess, our emergency fund is a bit low at the moment. We had about five months worth of living expenses saved into our emergency fund. Then, our car broke down and we had to purchase a vehicle, so that drained our emergency account. Financially, this is the biggest priority for me at the moment. We are at about 2 months right now and it’ll take at least 8 to 10 months to save back up to our target. I’ll probably sell some stocks in Q4 and redirect some of the earnings to the emergency fund. We’ll revisit this topic again at the end of the year to check how I’m doing. My target is 6 months, but we have a dual income so maybe the time can be reduced to 4 months.
Do you have an emergency fund and how many months of living expenses would it cover? Are you an investor and do you agree with the whole emergency fund concept? It seems many investors would rather put the money to work. Also, let me know your opinions on the whole dual income adjustment.
retirebyforty’s personal strategy
- Emergency Fund should be in a high yield bank saving account where one dollar is worth one dollar and I can withdraw anytime.
-Put money in the emergency account before other investments. (Except employer match 401k, which is free money.)
- If emergency account runs low, replenish by saving and liquidating some investments.
5 reasons to have an emergency fund at Invest It Wisely
How much saving should you have? at Money Green Life