Today's economy

How much is an emergency fund worth?

By Kevin Press,

Comments (7)

Man wondering, 'Should I save for a rainy day?'A friend of mine has a couple of small renovation projects under way on his home, and he’s looking at two sizable invoices that are due for payment this month. The numbers aren’t huge; both are in the mid-four figures. Still, this is causing him a bit of anxiety because he may have to dip into his emergency fund to pay the bills.

He is concerned enough about it that he called me to talk through his options. I shared my standard “I’m not a financial advisor” disclaimer, but it did no good. (For reasons that will be obvious in a moment, I think he should connect with an advisor.)

My friend loves his emergency fund. He’s a bit fanatical about it, to be honest.

This is understandable. Emergency funds are an important part of any financial plan. Opinions differ on how large your fund should be. My personal view is that you should evaluate the risks currently present in your life, and save accordingly. If job loss is a possibility, I don’t think it’s unreasonable to try and save six or even 12 months of income. At other times, having just a couple of thousand put away is sufficient. The only rule that applies universally is that saving is a good idea.

Here’s my friend’s question: Should he dip into his emergency fund to pay off the bills, or should he pay a portion of what he owes with his line of credit?

The answer seems so glaringly obvious to me that I had a hard time holding back. I would never, ever pay interest on a loan when I have cash at hand. I’m afraid I put this to him rather bluntly.

This is where the debate got interesting. As he talked me through his thought process, it became clear just how worried my friend is about drawing down his emergency fund. The interest he’d have to pay the bank that issued his line of credit is – in his mind – worth it.

Is it reasonable for my friend to pay interest on a loan so that he can rest easy with a sizable emergency fund? Or is he allowing his anxiety about money to get the better of him?

You know which side I’m on. What do you think?

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SPBrunner on

Everyone looks at money differently. I would suggest that if he can sleep with a loan, but not a depleted emergency fund, he should go with the loan.

Ray on

Once you go down the slippery slope of removing your emergency fund for “a bill” where does it stop? It gets easier and easier to spend your fund on fast food or why not that vacation? You can always save it back up, right? Use the LOC and pay the bank and feel the interest pain caused by doing renos when you didn’t have the cashflow in the first place.

    kevinpress on

    Thanks Ray. I really like the way you’ve put this.

    My original thinking about my friend’s problem was that it was anxiety-related. In other words, does it make sense to pay good money in order to sleep better at night (i.e. maintain a healthy emergency fund balance)? I think there are better ways to deal with anxiety than don’t require a monthly interest payment.

    But you’ve raised a separate issue here that I think is equally important. Is your emergency fund for emergencies or not? Maybe the interest payments he’ll face on his line of credit will encourage the kind of discipline he needs to avoid overspending in the future.

kevinpress on

Thanks Dianne. There’s no point in saving for a rainy day if your roof leaks! (Sorry, couldn’t resist.)

Dianne on

I’d use my emergency fund. And I actually did last year for a new roof, or the remainder of it. Some was spent earlier on some other things for the house.

So, although I need to re-save to build it back up (and this will take some time) and while I do miss having it there (really miss it), I’d still never take out a loan where I had to pay the bank interest. They make enough off me already and I’m not in debt to anyone.

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