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Can an Emergency Fund Be Too Big?

This article was written by in Saving. 8 comments.


Being prepared for financial emergencies is a primary step on the path to creating and maintaining solid footing, but as with other good things, too much of a positive can be negative. Every individual’s or family’s situation is unique, so it’s difficult to prescribe a hard and fast rule about the right size of an emergency fund that applies to everyone. Having three to six months’ worth of expensive in accessible cash is a good start, but many people will find that this will be too much or not enough.

I’ve suggested taking a holistic view by breaking your emergency fund into five (six) levels including cash on hand, a high-yield savings account, sellable investments, available credit, friends and family, and possibly readiness to reduce expenses. These options range from stagnant to flexible in terms of what they allow you to do with your money. For example, if you keep a small amount of cash ready under your mattress to use if you can’t access your bank accounts, that money loses purchasing power due to inflation the longer it stays outside the financial system. High-yield savings account may match or exceed inflation and investments may beat inflation over time. Access to credit allows you to invest more while still providing an option to help during an emergency, and friends and family can occasionally be tapped if necessary without risking your credit (just your reputation).

As we travel further down the list, more of your money is freed to work for you, invested for the future. If you are comfortable with the latter options, and if you are experienced with credit and not in danger of falling into debt, it’s better to tilt your emergency plan in that direction. I wouldn’t recommend keeping more than one year’s worth of expenses in a savings account narrowly beating inflation if at all, and the more other options are available, like credit and other somewhat liquid investments, a tiered approach will allow you to have your assets work for you.

Published or updated March 17, 2009. If you enjoyed this article, subscribe to the RSS feed or receive daily emails. Follow @ConsumerismComm on Twitter and visit our Facebook page for more updates.

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About the author

Luke Landes, also known as Flexo, is the founder of Consumerism Commentary. He has been blogging and writing for the internet since 1995 and has been building online communities since 1991. Find out more about him and follow Luke Landes on Twitter. View all articles by .

{ 8 comments… read them below or add one }

avatar The Weakonomist

My parents have an emergency fund that is far too large. It was so big that when dad bought a car last year I told him just to write a check out of their account. Since then they’ve paid off their house and so bow have even more cash coming in. I’ve convinced them to at least open a few CDs, but they really need to invest more. This isn’t because they don’t have enough for retirement, but because they are throwing away a decent fortune by not investing more.

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avatar Craig

Essentially I don’t think an EF could be too big if it doesn’t affect the rest of your finances. If you have a solid couple of months, and having more in your EF could cause you to get into debt, or affect your standard of living, than it would be a good idea to hold off. It’s all relative.

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avatar Grant Baldwin

I would agree that the size of your emergency fund is relative. What is going to help you sleep better at night? How stable or secure is your current situation? The shakier the ground is that you’re on, the bigger your emergency fund should be.

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avatar Kim McGrigg

I feel most comfortable having the three months’ worth of expenses set aside in a savings account for emergencies. That being said, I am realistic about the word “expenses.” There are a lot of expenses that could and would be cut in a true financial emergency. That is why I really like that you included “readiness to reduce expenses” as one of your levels.

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avatar Stephanie

I think I might have too much money in my “emergency fund”. With interest rates dropping, even in the so-called “high yield” accounts, it seems that I could be doing better things with at least some of the money. I’m starting to pay extra towards my student loans, which is thereby reducing my overall financial burdens. But I have to say, when I got laid off last year, I felt a lot more comfortable knowing that I had enough money in my emergency fund to tide me over for quite a few months. And once I got a new job, I started saving more and paying more on my loans.

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avatar Roger

Not a bad post. Since I got downsized last year, I’ve been thinking about where I’d go to draw money if I really needed it. Luckily, a combination of unemployment, part time work, and a generally frugal lifestyle means I’ve been alright to this point, but it’s been comforting to have a plan of how to draw down my accounts for living funds (and cut back on my expenses) in order to make due for a while longer.

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avatar aa

People now who are scared of possible layoffs are those without a big emergency fund. Think about that!

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avatar Rassah

My mother-in-law, who is in her 60′s lives in a $30k house, and barely scrapes by on $800/month social security checks, has over $40k in a local bank savings account, which pays %0.3APR, and about $50k in cash in a bank safe. she makes about $3.00 in interest a month off of this. We tried many times to convince her to at least put the money into a high yield savings, since it would still always be readilly available, but after months of it we just quit. I guess some people are just too stubborn and paranoid.

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