Actually that you don not need emergency fund at all
Along with dynamic your oil each three,000 miles and checking your child’s trick or treat bag for weaponized apples, the common recommendation to form associate degree emergency fund is too prudent. All you wish is associate degree objective understanding of risk to comprehend that there ar much better places to place your cash thanassociate degree inert account that can’t enrich you.
The most recognizable personal finance mavens are almost unanimous in their advocacy of the emergency fund as a vital part of any common-sense financial plan.
Their recommendations differ only on size three months six months perhaps eight months worth of living expenses are enough to accommodate whatever misfortune might befall you. But to what end? And do people really listen, or are these just empty dicta written to take up space
Don’t match it
First of all, exactly how much money are we talking about here?
Looking at the most recent statistics, per capita income in the United States was $55,836.80 in 2015 according to the World Bank, and the personal savings rate of disposable income was 5.3% in August, 2016, according to the Bureau of Economic Analysis.
Assuming an effective tax rate of 20%, and using the conservative recommendation to sock away eight months’ worth of living expenses, that means it’d take about $30,000 to create a sufficiently stocked emergency fund. Even using the three months’ figure, you’d still need $11,000 for an emergency fund that passes the muster of convention. If those numbers sound high, or even if they don’t, understand that in the U.S. the average household credit card debt was $16,048 in March, 2016. Americans are also carrying a cumulative $1.2 trillion in student loan debt, which dwarfs the credit card debt on a per borrower basis.
In other words, the math doesn’t come close to working out on emergency funds. If the experts are going to issue a blanket recommendation to millions of people that they should all create a buffer to tie them over in unforeseen circumstances, it would make far more sense to say, “Instead of amassing an account that pays you 0%, or a few basis points above that, maybe you should focus on closing out an account or two that’s costing you 15%.”
Clear Debt First
It’s easy to insist that emergency funds are crucial for everyone, while ignoring just what position the average household’s finances are in. If you’re carrying credit card debt, student loan debt, or both, then building cash reserves for the purpose of anything other than paying down those debts should be the last thing on your mind. Of course, the more economically you live and the more money you make, the better positioned you are to create an emergency fund. But this is where the irony lies. Because, as a rule, the folks who are diligent enough to live without consumer debt usually pay their bills on time. They do not impoverish themselves so they or their offspring can attend college, and they do not spend extravagantly. They are also the ones who are going to be least prone to emergencies, and thus least in need of any emergency fund.
Perhaps you’re worried about the transmission falling out of your car, which would necessitate a $3,000 repair. If you feel that the prospect of this problem warrants creating an emergency fund, but you’re already carrying enough debt to cover three or four transmission replacements, the sad news is this: your emergency has already begun. It began several thousand dollars ago.
If you’re going to minimize risk for yourself or your family a noble task in and of itself society has already developed several methods for doing so, any of which you can use to your advantage. Worried about a debilitating illness or injury? We have health insurance for that. Not only will a comprehensive health plan cost less than a regulation emergency fund, the former is earmarked for a specific purpose. The same goes for the fear, however irrational, of a cataclysmic car accident. Again, we have auto insurance. If you’re really that concerned about worst case scenarios, spending a few dollars raising your coverage limits to the maximum makes far more sense than does spending thousands more on an emergency fund.