When You May Not Need an Emergency Fund
While we often take the existence of a contingency fund for granted, not all financial experts agree . There are times when it doesn’t make sense to have an emergency fund, as we usually think.
First, a little clarification. When we talk about a “reserve fund,” we usually mean living expenses for three to six months. Ideally, this money should be kept in an account that you can quickly access when a specified emergency occurs. Some advise keeping it in a regular but segregated bank account, although financial expert Dave Ramsey offers a money market account .
Now that we’ve revisited these basics, the Early Retirement Now personal finance site suggests that for some, this may not be the best way to keep their savings. Of course, a money market account may be worth more than a regular savings account, but that won’t be any better than the right investment. More importantly, emergency funds are designed to offset costs in the event of a major financial crisis. However, if you can get an interest-free loan, then the question becomes controversial:
The tension of cash flow is the same for us, or at least similar to people with an emergency fund. The only difference is that we never had an opportunity cost leak because we invested our savings in high-yield assets rather than in the 0.50% money market account.
This is a highly subjective situation, but it has a certain meaning. If an interest-free temporary loan is available to you, then you start to face opportunity costs if you have thousands of dollars remaining uninvested. When an emergency occurs, you can quickly pay back what you need now and then sell some of that investment to pay off the emergency before it incurs interest costs. This option may not be available to people with bad credit, but it is worth weighing all the options.