Traditional advice suggests that you need 6-9 months of spending in an emergency savings account. But as inflation hits its highest level in 40 years, some savers may be wondering: Do I really want that much money in savings?
For most of you, the short answer is probably yes, say the pros. An emergency fund is a cash reserve that serves as a contingency plan in the event of job loss, unexpected medical expenses, an injury requiring lost time, major expenses such as replacing an air conditioner, or an inconvenient car repair, and more. The pros say the best places to put your emergency fund are somewhere that’s easily accessible but still earns you money like a high-yield savings account or money market account.
“Your future self will be very happy that the money is there if and when you need it,” says Mamie Wheaton, financial planner at LearnLux. Adds Greg McBride, chief financial analyst at Bankrate: “The money in the savings account is yours. The bank pays you for it. Meanwhile, “with a line of credit, there’s no guarantee it’ll be there when you need it and if it is, it’s not your money, so you have to borrow, pay interest and eventually pay the money back,” he adds.
And if we’ve learned anything from the past few years, it’s that real emergencies happen when you don’t see them coming. “That’s when truly catastrophic choices are made that can take years to recover from similar loans at predatory rates or spending money you just don’t have,” says Brian Hamilton, CEO of the financial company ONE.
Who Might NOT Need an Emergency Savings Fund
That said, the pros say that not all of you need that money in a savings account. “If you have taxable investments that you could draw or borrow from in an emergency, you might not need as big of a cash cushion,” says Lauren Anastasio, director of financial advice at Stash, the financial subscription platform. (Here’s the minimum you might need in your emergency fund if you’re struggling to save.)
And McBride notes that, “Dual-income households with stable, predictable paychecks may be able to get by on a cushion of less than 6 months of expenses, but the opportunity cost of having more savings emergency is far less than the actual cost of not having enough.
You may also have another form of money that could help you, and that could also mean keeping less of it in an emergency fund: “If you have a fallback plan that would help you take care of yourself and your family if any of these situations occur, you may not need to put money aside,” says Wheaton.
You might also be thinking, but couldn’t I tap into the equity in my home rather than pouring money into a lower-paying savings account? It may not be your best option, say the pros. “A HELOC is, at best, a supplement to your emergency savings, not a replacement. When a recession hits, lenders often cut or freeze property equity limits, which means that when you you need most, there’s no guarantee it’ll be there,” says McBride. And Bobbi Rebell, author of Launching Financial Grownups and personal finance expert at Tally, says HELOCs “can be a band-aid to stop the bleeding and begin to heal” if you don’t have enough savings yet. But “HELOCs often have a variable interest rate, which means you could find yourself paying a lot of extra money to the privilege of accessing that line of credit, so ideally you would have the two to complement each other,” says Rebell.
But even if you have some sort of backup plan, the pros say an emergency fund serves a variety of purposes and one of them is peace of mind. “Keep in mind though that if you’re going through tough times, the thought of paying interest on your money may feel more stressful than it seems today. You may also be dealing with financial anxiety. if you don’t know how long you’ll be able to repay the debt or if you’ll be able to repay it,” says Anastasio.