I have a love-hate relationship with my emergency fund.
Some days, it feels oh so good to have that money stockpiled away, knowing that if something, anything happened, I would be okay. By the next morning, I am so frustrated with the snails-pace progress of my other financial goals that I want to immediately ditch any more contributions to my EF. I think it might be time to do just that – even though I do not have 3-6 months of living expenses set aside.
Big or small, the personal finance world overwhelmingly advocates the importance of the emergency fund. I totally get that. Life happens. Shit happens. Emergency funds help.
Suze Orman recommends making minimum payments on your debt until you have 8 months of living expenses stashed away (Whaaaa?). Dave Ramsey, on the other hand, suggests building a baby emergency fund ($1000), tackling your debt, and then building your 3-6 months of expenses emergency fund. Gotta say, I’m with Dave on this one (although I actually think $1000 could be a little low, depending on your life circumstances).
So this goes back to the question of how essential is an emergency fund and how much do you really need? Some PF bloggers argue that 3-8 months of living expenses in an emergency fund is not necessary for everyone and may be considered a lost opportunity since you could be investing that money instead of holding cash. I read these posts and they make my heart skip a beat. Like I really love these posts. A personal favourite that rethinks the emergency fund comes from Green Swan in “Rainy Day, Rainy Month or Rainy Year“.
Because 6-8 months of living expenses saved in a chequing account sounds bananas to me. Some people really thrive on having this safety net. Yet I feel like a small part of me dies when I see important dollars getting funneled into that EF account every month only to sit there (I know, I know, that’s the whole point). This begs the question:
Do I actually need to keep building my emergency fund right now?
I think continuing to build my emergency fund right now is totally overrated, and here’s why:
- I have no children or pets.
- I have a (relatively) stable job. This, of course, always comes with some degree of uncertainty, but I work for a well-funded non-governmental organization. My chances of getting laid off are virtually nil and chances of getting fired also minimal.
- I do not own a car.
- I do not own any property.
- I live in Canada, where medical emergencies are still a thing but our tax dollars pay for them.
And the current status of my emergency fund? $1770.87.
The money is stashed in a high-interest savings account, earning 1.95% interest. I have been sending about $100/month to this account to slowly build it.
I also have a small chunk of change invested in a tax-free savings account, which can be accessed anytime without penalty, as well as separate savings accounts for big household purchases, etc.
My main rationale for not continuing to build my emergency fund right now is that I am still paying down my student loans. Even with my debt, I was initially jazzed to see my emergency fund accumulating, but it’s hard to feel that joy when I am getting nailed with student loan interest every day. Don’t get me wrong – it is very comforting to know that I do have something set aside for an emergency, and I think everybody should have some kind of emergency fund.
But since potential emergencies in my world don’t include car repairs, pet surgery, or fixing the leaky roof on my non-existent house, my emergency potential simply seems much lower than the average bear. I would hazard a guess that I am not the only Millenial in a situation like this, either.
What do you think – are big cushy emergency funds always essential or are they sometimes be overrated? I think I am ready to stop building mine right now – how are you doing with yours?