The lost opportunity of emergency fund – sitting idle or investing?
We all heard that in order to cover the expenses of unexpected circumstances in life, we need to have savings equal to at least three and preferably six months’ expenses. And that’s not the retirement savings. It’s the kind of money that you know you have but can neither invest nor touch until the unexpected happens. Which means that, for example, if your monthly household take-home net income is $4,000, and if you spend every dime of the $4,000 just to cover all expenses including retirement and child support, then times 3 or 6, you need to have somewhere between $12,000 and $24,000 emergency fund sitting idle. Now if your take home net income is $5,000, which means that you need to save $15,000 to $30,000 for the unexpected. This is not easy for most of us. So how do you do that? Many financial advisors will tell you to put set amount aside each month to accumulate. That’s easier to say than done. You would have to cut down your disposable spending for that. Imagine saving $200/month for this fund starting from the current month, it’ll take you 5 years before you reach your minimum goal. Let’s not talk about the commitment you have to have just to put aside the amount. What about the lost opportunities of this fund? To have the money easily accessible, you probably won’t put in a mutual fund or stocks, what would you do? Like what the financial advisors suggested, you can try a high yield savings account. Here comes the math part that bothers me, so it means that you could be watching your hard-earned money disappearing as taxes and inflation have their shares. Then it comes more interesting stuff, people are talking about 6 months of expenses are not enough because unemployment usually happens somewhere between 6 and 12 months. Oh boy, that’s tough. For some of us, one month emergency fund is enough for the unexpected. Anything more than that belongs to the “disaster fund”.