Can You Save Too Much in Your Emergency Fund?
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Financial security has become very important to me in recent years. I hate the feeling of living paycheck to paycheck and being in debt, so much so that I decided to do something about it.
Once my husband and I started to clean up our acts financially, we began to live off of one income and sock away the rest. Before we knew it, we had a pretty sizable emergency fund saved up, to the tune of about a year’s worth of living expenses.
It Helped Me Leave My Job
It felt good to have that amount of money backing up our lives in case something happened, and it’s actually what led to allowing me to quit my job in corporate finance a little over a year ago. I knew there was no way I was ever going to leave that job if I didn’t have a huge cushion to fall back on, and our emergency fund was my cushion.
So I quit my job, we committed to living off of one income and continued to save like crazy, even with my loss of income. Getting to work from home as a freelancer while staying with my daughter has resulted in a huge increase of happiness in our household. It really has been wonderful, and I realize that our emergency fund helped us reach that goal.
But after a year of having that money languishing away in a little-to-no-interest-bearing savings account, we decided we needed to do something with it, because we were basically losing money on it due to inflation. Anytime we’ve had any little emergency arise, such as our hot water heater going out, we’ve been able to work it into our budget rather than touching our emergency fund, so that money just continued to sit.
What We Did With The Money
After a year of not having traditional employment, we realized that emergencies are rare and we were going to be okay. We opted to pour about 75 percent of our emergency fund toward our last remaining debt — our mortgage. I realize that many people will tell you that we should have invested it the stock market instead, but paying off our mortgage is what excites us, so that’s what we did with our money, and we look forward to having our mortgage paid off by the end of the year. (I still can’t believe it!)
What we realized in this whole process is that we had way too much money socked away, giving us nothing, except for a little bit of added security. We decided to keep enough money in there to continue to give me an (albeit smaller) sense of security, and we assessed our other financial assets.
Let Your Non-Liquid Assets Be Your Emergency Fund
Our money should be working for us rather than depreciating in a bank account somewhere, and we should let our other assets work for us instead. It took only a little bit of convincing from my husband to remind me that we have plenty of sources of cash that we could drum up if we had to in a dire emergency.
If something were to happen, we could get a loan on either of our paid-for cars or even sell one. I’m not saying it would be ideal, but emergencies don’t always happen, and this is just in case of emergency, such as a major health scare that insurance wouldn’t cover. It would be a way for us to pay some bills if we had to, and if things got really bad, we could always mortgage our house again since we have so much equity in it.
What We Keep Now
We definitely still have a healthy emergency fund. We aim to always keep $10,000 to $15,000 in our online savings account at any given time, and that still is a big chunk of change, but it’s what makes us comfortable now, and that number is always subject to change.
A Year’s Worth Is Probably Too Much
Everyone has a different situation and level of comfort, but I do believe we got carried away with the amount of ours, especially considering the two assets we have sitting in our garage. I’ve recommended to people before that a year’s worth of emergency fund is a great amount to have, but I’ve definitely changed my tune on that in the last few months.
It can be difficult for many people to save up that amount, and it’s unnecessary in most cases since emergencies are (thankfully) rare, so I’ve changed my tune.
Do you have a large emergency fund, or do you rely on other assets to cover needs? Do you find it challenging to save up an emergency fund? What do you think is a relatively good amount to shoot for in an emergency fund?