Is It Really Wise To Have An Emergency Fund Set Aside For A Rainy Day?
For generations it has been customary “good advice” to have an emergency “rainy day fund” tucked away in case a car dies, a furnace goes out, or any other monetary disaster strikes your household. However, in spite of the emotional pull towards the security of an emergency fund, objectively, the data out there may indicate that this assumed precaution is actually not the best use of your hard earned money.
Different financial advisors may have varying opinions on how much you should have in your emergency fund, whether it be one month’s income, 4 month’s income, or the generally recommended 8 months of income. However, if you make the average income of roughly $42,000/year, you would need to tuck away almost $22,000 to meet this requirement. This sounds like a great idea in theory, but when you also figure in the fact that the average American holds over $5,200 in credit card debt at a very high interest rate, the massive load of student debt facing many Americans, and other personal debt issues, it may be wiser to focus on paying off debt that is costing you negative interest every month, rather than saving money away at a neutral interest.
Pay Off Debt Before You Worry About An Emergency Fund
While it may seem important to have an emergency fund, it may be even more important to eliminate debt from your life, so that you’re ability to save and restore your finances in light of a disaster is much improved. If you’re goal is to prevent an emergency with a car breaking down or a furnace going out, to the tune of several thousand dollars, while you’re already carrying several thousand dollars in credit card debt, your real “emergency” occurred the moment you went into debt. You can eliminate the true financial emergencies in your life by getting out of debt first before you worry about potential future emergencies.
Emergency Fund Or Investment?
If debt is no longer an issue, the next question that should be addressed is whether or not your savings should go towards a 0% interest emergency fund, or in an investment that will at least yield a positive return? You will have to talk to your wealth advisor to determine the best course for your personal financial situation, but it’s possible you will find it’s much more efficient to have some liquid investments offering a decent yield, compared to the box of cash stored under the bed for the rainy day emergency fund. For more information on the concept of Emergency funds and whether or not it’s a wise use of your money, speak to a Redhawk Wealth Advisor near you today.