10 Reasons to have an Emergency Fund
November 5, 2007 by Pinyo.
Many financial professionals and experts advocate that we keep at least 3 months of living expenses in liquid investments such as CD, money market, and high-yield savings. If you have any doubt regarding the validity of this advice, here are 10 reasons that may change your mind.
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If you are in a money crunch…
- Your friends could be just as broke, and you could ruin a good friendship over money.
- You can only ask so much from your family. You don’t want to be the person that everyone shies away from during the family reunion.
- Charging your credit cards without a good payoff plan is a path to financial imprisonment.
- Payday loans are worse than credit cards. They charge exorbitant amount of interest and fee to lend you money for a few days.
- It’s not fun to liquidate your investment in the middle of a market correction.
- Borrowing from 401k will result in double-tax penalty, stunt your retirement growth, and may result in early withdrawal penalty if you fail to pay back the loan. Here are 7 reasons why borrowing from your 401k is bad, bad, bad!
- Early withdrawal from your IRA will result in taxes and penalty, and erode your nest egg.
- Raiding your child college savings fund is not cool.
- Borrowing from a loan shark may involve back alley reminders, and termination without notice.
- Resorting to criminal activities to get quick cash inevitably results in prison time.
Do you have an emergency fund?
Carnivals
- This article was featured in the Carnival of Personal Finance #126 hosted by Million Dollar Journey. For more information please visit the Carnival of Personal Finance.
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401k, college-savings, credit-card, crime, emergency-fund, family, friend, ira, loan-shark, payday-loan12 Comments
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For most people, an emergency fund is a good idea for the reasons you give. I would add peace of mind to the list of reasons for having one.
But they are not for everyone: Emergency Funds Are Wasteful.
I never used to have an emergency fund, but last month I was glad I did as we had some big unexpected expenses. I think it helps break the credit card habit. I agree with you about payday lenders, can’t stand them!
Yes I do. And I liked number 10 the best. :-p
The others are excellent points, but that one just gives me fun imaginary pictures. Mrs. Micah as cat burglar. Mrs. Micah as world-famous jewelry thief. Mrs. Micah as mafia don.
No I didn’t but I do now! All of my savings and emergency funds were locked up in my investment brokerage accounts during a recent family emergency. Luckily I was able to sell some holdings for emergency cash. Would you consider that an emergency fund?
-R
Sorry guys, it was a busy day yesterday finishing up the Carnival of Money Stories.
@TraineeInvestor - welcome to Moolanomy and thank you for sharing your post.
@Louise - welcome to Moolanomy. Good to hear that you were prepared. And yes, those Payday places are horrible.
@Mrs. Micah - very cute
@Raymond - Right now I have 1/8 in regular savings, 1/8 in online savings (4.5%), 1/4 in CD (4.75%), and 1/2 in brokerage account as backup emergency fund. I may be transferring more from savings and CD to online savings in the future.
How can I establish an emergency fund when I am in a perpetual money crunch?
Minimum Wage - “A journey of a thousand miles begins with a single step.” by Confucius
If you want to save $1,000, you can save $1 a day for 1,000 days (about 3 years); $2 a day (about 1.5 year); or $2.75 a day for 1 year.
PS: I am publishing a post to answer one of your question tomorrow.
Hmmm…Income $750/mo, rent $450, aggressive creditor $250*, phone, clothes, food, bus pass…no room to save $1 a day.
* aggressive creditor WILL execute garnishment if i default
Minimum Wage - It’s not easy. But if you don’t take that first step, nothing will happen.
You saw my numbers. If I have to choose between paying my current obligations and saving money, the emergency fund will have to wait.
Minimum Wage, you might consider taking on a second job temporarily. I’ve been in the same situation. If you can’t save $1/day, you’re in need of financial help. Based on your income, you qualify for food stamps and other benefits. That could help you get on your feet. It’s not permanent, just enough for you to get some savings up.
Emergency funds are critical and I agree that payday loans are a bad idea given the high levels of interest charged. With a little careful planning there is no reason why we all can’t grow a small emergency fund.