Six months’ worth of living expenses are in my emergency fund. Even though I believe it is very important to be prepared for unforeseen expenses so that I do not end up in credit card debt, I do not want to keep even one dollar more in my emergency fund than that amount.
I’m mindful so as not to keep a lot of crisis cash in my high-return investment account for a couple of key reasons.
My just-in-case account isn’t a venture.
One main reason I don’t keep large chunks of change in my secret stash is on the grounds that I would prefer to put away my cash and procure a superior return whenever the situation allows.
I cannot afford to risk losing any of my emergency funds or having them tied up and unable to be accessed, so I keep them in a high-yield savings account. I receive competitive savings account interest rates of 4% from my savings account. However, it is still a significant amount below what I would be able to earn if I invested my money in a S&P 500 index fund, which has a potential return of approximately 10% annually over the course of time.
I don’t want to invest more money than I absolutely have to in an asset with a much lower return on investment than I could get elsewhere. So, I only keep the money I absolutely need, and I move the rest to my brokerage account so I can invest in ways that will help me grow my net worth more effectively.
I only use my emergency fund when absolutely necessary.
Another major reason I don’t have a larger emergency fund is that I only use it for truly dire, completely unanticipated emergencies. I don’t want to use my emergency fund to pay for things that aren’t expected but come up, like car repairs, home repairs, or copays for doctor’s appointments.
Obviously, while you can’t foresee when these things will occur, you can anticipate that they will eventually happen. As a result, I do not view them as urgent matters but rather as things to plan for and save for. I have separate assets for medical service needs and for vehicle and home issues, and I keep cash in those records so I’m prepared when the unavoidable occurs.
The cash in my backup stash is just there in the event that somebody becomes truly ill,
we experience a significant decrease in pay, or something else undoubtedly unforeseen occurs. There is little reason for me to put more money in this emergency account because I want to save for the predictable surprises in other accounts, and it is less likely that I will need to use my emergency fund for them.
I should have more than enough time to recover or make a new plan in the event of a true emergency with the six months of expenses I have saved. When I could use the money better elsewhere, I wouldn’t put more money in there. Of course, everyone must decide for themselves what they are comfortable with; however, when setting your goal amount, keep in mind the true purpose of an emergency fund to avoid having too much or too little.