The emergency fund, the most misunderstood item in the PF community. It seems simple, start with $1,000 for emergencies than build to 6-8 month worth of living expenses. The only problem is too many people use the emergency fund as a crutch for not getting ahead.
Saving for an emergency fund, car fund, vacation fund, because I paid off $100 in debt slush fund. Overspending is overspending, even if you put lipstick on a pig. There’s nothing wrong with going on vacation when you’re in debt, but a really nice one because you “saved” for it really isn’t saving. Just because you split your spending into different “funds” to tell yourself you’re budgeting, you’re really not. You’re still spending too much, even if you have little nice envelopes for it.
You can’t afford to contribute to your 401K so you miss out on the company match because of saving for an emergency fund. That’s a 100% gain on your money, beats any debt payments. Due to the fear of investing people hide behind the crutch of building an emergency fund. How many times have you heard when I get out of debt and have a sufficient emergency fund I’ll begin to invest. How come the same people always seem to have a monthly emergency?
If you’re in credit card debt you don’t need an emergency fund.
If you have 18%+ interest rate on your credit card, you’re in an emergency. Greece that European country that was going to bankrupt the Euro, they’ve defaulted numerous times in history. For bonds risk is priced in basis points so 1%= 100 basis points. Greece’s bonds are priced at a 7.5% interest rate, which means you’re more than 1000 basis points higher risk than Greece, who never pays their bills.
If you have $10,000 in credit card debt, and $5000 in an “emergency” fund, you should use that $5000 to pay that debt down. If an emergency arises you can charge it on the card, that’s cheaper than having 18% interest compound daily against you. I know some have 0% interest, you do get 4% charged for a balance transfer. Eventually the musical chair runs out and you won’t be able to transfer it anymore. If credit card debt isn’t an emergency, then what is?
Open a Roth IRA and put your funds in there.
Everyone needs liquid cash for monthly living expenses. I have 2-3 months due to my rentals, but I never plan to have nearly a year’s worth. I don’t consider that my emergency fund but part of my FU fund. When you’re starting out open a Roth and place your liquid funds in there. You can access your principle at any time. You don’t want to miss out on contribution years just because you’re trying to pay off debt and building a cushion. My biggest regret is not financing my Roth IRA for six years, I missed out on all those contribution years.
Once you feel comfortable enough with your cushion you can then start investing stocks in your Roth. The benefit is that you didn’t miss out on any contribution years. Hurry up 2013 catch up closes April 15. Another blogger expressed that this is a bad idea, as it will teach people to tap into their retirement accounts in emergencies. If you don’t have self control with your money, it doesn’t matter where the money is located.
Do you think rich people and those in the wealth building phase wonder how much they’re going to save into their emergency fund this month? Hell no, they’re wondering how to raise capital to buy assets at great prices. Want to get wealthy, think like they do. Don’t use your emergency fund as an excuse not to get ahead.
Do you agree that people hide behind emergency funds?