I was discussing personal finance with a friend from Stumble Upon the other day and he made the following interesting observation concerning the idea of emergency funds:
Less certain about “emergency fund”, but my wife likes the idea. With the dollar losing value every day, and interest rates so long, it seems like the wrong thing to invest in. Wouldn’t it be better dumping that money into my mortgage, or some other sort of investment (Gold is popular…)
He is correct, as an investment vehicle there are better plays out there than a savings account that will earn 3.0% to 3.5%. However, an emergency fund is NOT an investment vehicle. yes, you should keep it in an interest bearing account. Yes, it should make SOME money. However, that is not the purpose of the emergency fund. Its purpose is be liquid cash available in case you lose your job. Or if your car breaks down. It is good to get some return on what ever account you use for the fund. Just don’t get caught up in it too much for this one part of personal finance. The important part is being responsible and being prepared.
-Kevin
2 Comments
I was thinking about this recently as well, thinking that I’ll bet there are people who are actually thinking about stashing cash in their homes because they’re worried about bank failures, and how that might come back to burn them in the rears later. I thought that heck, you’re probably better off stocking up on canned goods – at least the size of a can stays the same, even if the value of the money you use to buy it doesn’t.
I know that’s not the “emergency fund” you’re really talking about, but … just something I was thinking about.
You’re right about the Emergency Fund. This should be in a savings account or a money market account and should have no part in your investing strategy. We just had a $750 auto repair last week and simply wrote a check from our emergency fund. While ours isn’t yet where it needs to be, (min of 3-6 months of expenses) it’s a great feeling to no have to use “plastic” to cover these types of emergencies. I recommend Dave Ramsey’s Total Money Makeover for a great explanation and a getting out of debt plan that’s worked for us.