There's nothing more reassuring than money in the bank. Knowing you have a pile of cash standing by to see you through emergencies helps you breathe a little easier, and of course it makes good financial sense, too.
While general consensus is that emergency funds are a good idea, there are some among us who don't actually need them. Are you one of these people? Here's how to tell.
Do You Fit All of These Criteria?
If you can say yes to all of the following questions, there may be room for debate on whether you really need an emergency fund. Remember though: only if you fit all the criteria should you consider going without the safety net of an emergency fund.
- Do you have a really good job? In other words, does it pay well, and is it secure, and are you confident that you're in good standing with your boss?
- Do you work in a growing field? In other words, one which is projected to experience growth in the future, as determined by the Bureau of Labor Statistics (BLS)? The BLS maintains a gigantic treasure trove of data on the US job market, including how much every field is expected to grow in the next decade and more.
- Do you have experience in your field that would allow you to get another job quickly and easily if you were to lose your present job?
- Do you have the credentials (degrees and/or certifications) that would allow you get another job easily if you got laid off from your present job?
- Are your living expenses low enough compared to your income, that you could easily weather a period of time without pay?
- Do you have assets that could serve as a financial safety net if you lost your job?
- Do you have good credit, and it lots of it available? In other words, do you have room left on your credit cards to put expenses if your income were to suddenly go away?
If you answered "no" to any of these questions, then you should have an emergency fund. Let's assume you do need one, since most people do. Here's why:
Here's Why You Probably Need an Emergency Fund
The reason for an emergency fund is to have some money ready in case you lose your job or you suddenly have some other large expense.
Emergency funds aren't for replacing your income in the long term. The money is put aside to bridge the gap between your sudden loss of income (or rise in expenses) and the point when you get it all in balance again.
For that reason, most experts would advise that you have saved up enough money to cover at least one month's expenses. That's the bare minimum, however, and some would actually recommend up to six months' expenses be covered in your emergency fund.
Some financial advisors might argue that having too much liquid cash in your emergency fund may cause you to miss out on other opportunities. It's called the "opportunity cost", just for that reason. Diverting too much money away from the stock market scares many advisors, which is why any more than six months' worth of expenses is generally thought to be overkill.
Basically, you should have enough saved up in your emergency fund to cover expenses for as long as it would take you to find a job. Aim for six months but until you reach that point, whatever you can manage is better than nothing.
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Chris Hardy, CFP®, EA, ChFC®, CLU®, NTPI Fellow® is the Director of Planning and Investments at Paramount Investment Advisors, Inc., a fee-only wealth management firm located in the metro Atlanta suburb of Suwanee, Georgia. Chris specializes in providing clarity to his client’s financial vision through comprehensive and strategic wealth planning. Chris and I became friends after meeting at NAPFA conference , and I asked him to write some thoughts on the need for an emergency fund as a guest topic for this site. |
Chris Hardy | Paramount Investment Advisors, Inc.