Financial Advice the Experts Disagree On: Emergency Funds

With the help of Dave Ramsey (and other money gurus), “emergency fund” has pretty much become a household phrase. Most people know that an emergency fund is an important part of getting your finances in order. But not everyone agrees on the details.

We at Two Cents cover a lot of articles that include pretty standard personal finance advice. As simple as this advice is, not everyone agrees with it. And that’s okay, because sometimes traditional advice is worth questioning.

In our “Financial Advice the Experts Disagree On” series, we dig a little deeper into these seemingly basic topics and look at different perspectives on the matter.

According to Ramsey, the following should be true for building your emergency fund:

• You should save for three to six months of living expenses.
• You must keep the savings in a money market account.
• This fund should only be used for emergencies.

Sounds simple enough, right? But here are some ways people question that advice.

Six months is too much

Some say six months of spending might be too much. Andrew, founder of the financial site Live rich cheaplyexplains this point of view by telling us:

Over-saving is rarely a bad thing. But I don’t necessarily think the traditional notion of keeping six months worth of expenses in an emergency fund, which is usually in a “high yield” savings account, is the most efficient use of your money… While you should probably keep some money somewhere safe, like a savings account, six months of living expenses seems a bit excessive. I would prefer more of my money to be invested in a mix of stocks and bonds.

Get Rich Slowly editor Lisa Aberle adds an interesting point. She explains that as you learn more about money, your spending becomes more predictable, so there’s less chance of an emergency. She told us :

You’re starting to see trends in your spending that can help you better plan for the future… Everything has become more predictable. Could we still have an unpredictable emergency? Absoutely. But putting aside the “predictable and unpredictable” expenses each month, [my family feels] safer with only three months of living expenses in our emergency fund. People should save as much as they can, but I think three months is reasonable and enough for most people. But hey, if people feel more comfortable with 6 or 12 months, go for it!

If six months sounds like a lot, Suze Orman actually recommends saving eight months of living expenses. And, recently, she caused a little controversy on the following advice:

If you have an outstanding credit card balance [and] not much saved in emergency savings, i need you to listen. My advice has changed. I want you to only pay the minimum due on your credit card balance and instead make it your top priority to build up as much of an emergency fund as possible.

According to the Huffington Post, Orman recommends eight months because it usually takes that long to find another job if you lose your job.

But not everyone agrees. In a post to The single dollar, Trent Hamm pointed out that saving so much money is a long-term goal for a short-term problem. This goal can be overwhelming when monthly bills and credit card statements pile up.

The money could be used

As mentioned, it’s traditionally recommended to keep your emergency fund in a safe and accessible money market account. But Andrew tells us there’s a problem with that: “With ‘high yield’ savings accounts earning less than 1%, your emergency fund is slowly being eaten away by inflation.”

We’ve talked about this before, but some prefer to stash their emergency fund in a vehicle that will earn them at least a small income. money website Daily finances goes so far as to suggest investing your emergency fund:

In order to keep your emergency cash reserve truly available for emergencies, you’ll want to make sure to keep at least some of your money in a savings account, despite their low interest rates. But the closer you get to your emergency fund goal, the more it makes sense to let some of that money go to waste.

Not everyone needs an emergency fund

In a post for Get rich slowly, Aberle asked, “Is it possible you don’t need an emergency fund?” She told us most of what she said:

I would say most people need an emergency fund. Most, but not all… It seems that once people get past a certain point financially, their outlook on their extra cash goes from starvation mentality – Oh no! Save that money for emergencies!—to the opportunity mentality—Here’s a rental house at a very reasonable price. Spending this money is a great decision!.

She adds that you might reconsider an emergency fund if:

• You are sufficiently insured (health, life, car)
• You have no debt, or very manageable debt
• You have more than one source of income
• You have a high profit margin (your gap between expenses and income)
• Access to a home equity line of credit or perhaps responsibly used credit cards or a good amount of money invested in stocks that could be sold in an emergency is also helpful.

If you’re not sure how much to save for an emergency, or even if you should have an emergency fund, the truth is, there are no easy answers. It depends a lot on your situation. But most critics of standard advice seem to agree that when you’re having trouble, it’s best to err on the side of caution.

“How much is too much to save is almost as individual a question as why someone wouldn’t have an emergency fund in the first place,” Aberle tells us. “As the debt goes down and your profit margin goes up, the emergency fund could go down…In the “paycheck to paycheck” stage of personal finance, emergency funds are most important… ironically, when your emergency fund is probably the smallest. »

Over-saving isn’t exactly the worst financial problem to have. But, like most money-related topics, the details of your emergency fund are quite subjective. Ultimately, you’ll have to do what’s best for you. This could mean sticking to traditional advice; it might mean jostling it a bit.

Either way, there’s one thing we all agree on: it pays to be financially prepared for an emergency.

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