Without any doubt, you should have at one point heard that having an emergency fund is very important to you. Many financial experts will have different views on financial matters. However, they will concur that setting aside some money for emergency purposes is an essential element for healthy financial planning.
In most cases, many people will be worried about not having set aside enough savings in their emergency funds in case of an emergency. Different people will have different perceptions of how much is enough to set aside as emergency savings.The point is that what one person regards as enough may not be enough to another person.It is because different people have different living standards and financial plans. But, is there a possibility of having an excess in the emergency fund? Some people would also wonder whether it is advisable to put aside a big amount of money in their emergency savings while they could use it to do other ”better” things.
Disadvantages of Having Too Much in Your Emergency Fund
Your Money Loses Value
Your emergency savings should be easily accessible, and therefore you can only save them in a financial institution where it can be easily accessible in case of an emergency. Remember that it’s an emergency fund and you should be able to access it anytime at any place.
However, It is wise to choose an institution which will offer you higher interest on your savings, the interest on your emergency savings may not be more than one percent per year.It means that the interest on your savings is lower than the inflation rate, and you end up losing your money to inflation.If the average inflation rate is higher than the bank’s interest rate, you are losing money on your savings because the value of your savings is declining with time.The more money you save on an emergency fund, the more you end up losing to inflation.
Inability to Meet Other Financial Obligations
If you tie too much money into your emergency fund, you’ll find yourself unable to meet other essential financial obligations.These may include saving for your children education, paying off your debts, saving for your retirement or making a down payment to own a home.There is also a risk of losing on high returns investments that may be available at that time.
Your money will be more useful doing those things than overfunding your emergency fund.There is no need to save more than what is necessary when there are more urgent debts to be cleared like a high-interest rate credit card.It won’t be advisable to buy your essentials on credit while you have some savings lying somewhere earning nothing in return.
What is Considered Too Much or Enough
Different people will have different suggestions on what is too much or enough.The below tips will guide you in deciding what is too much or enough for your emergency fund savings:
What experts Recommend
Most people recommend that you should set aside at least between three to six months of your monthly expenses on your emergency savings. However, some experts recommend you save a few dollars to get started then save as much a one year of your annual income. You should also consider other factors such as the size of your family, whether you live in a rented house or your own house, maintenance costs of your car and your job security.
Let Your Emergency Savings act like an Insurance Cover
Your emergency savings is like an insurance cover that secures you in case something bad happens.So use your savings only when there is a crisis just like an insurance policy such as an auto insurance cover.
You need to select a good insurance cover at minimum premiums and avoid those covers you may rarely need in reality.The same case here you only need to put aside just adequate to cater for you in case of a crisis and avoid your money staying in a bank account earning almost nothing.The same way you might not take some insurance covers the same way you should have lesser emergency saving if you feel you are quite secure.
If you know that a three months expense saving will be adequate, then you don’t have to save more than that.
Think About other Alternatives other than Overfunding your Emergency Fund
Having reserved funds for emergency purposes prevents you from borrowing from your friends and relatives.It also goes will in ensuring that you don’t get into debt through use credit facilities like credit cards.Most importantly it helps you not to dip into your retirement savings.
Some individual retirement accounts allow you to withdraw fund for medical bills without any penalty.You also get allowances to buy your first home from them.Remember the money you withdraw won’t earn any interest, but certainly, it’s better than getting your self into a high-interest debt in the event of an emergency.When you feel the urge to over fund your emergency account, you should put this in your mind.
You should also know that in case you are no longer in a job, the benefits of being unemployed will reduce the amount you can withdraw from your savings if you are still eligible.
Use your Emergency Savings to Support your Financial Plans
Your instincts may show you that the bigger an emergency fund is, the better it is for you. However, you should know that bigger savings to your emergency fund are likely to be hurting your profits.Remember the investments and opportunities you could be missing while saving your money in a bank.
Despite the fact that different people will have different views and opinions on how much should one save in an emergency fund, use these tips to determine how much you should have in your emergency fund.They will aid not to overfund your emergency savings and miss opportunities.These tips will go well in ensuring that you realize your financial plan without much strain.
It is important to ensure that your emergency fund works with your entire financial plan and not against it.Your financial plan enables you to meet your financial obligations timely.It will also help you to invest wisely on high return investments while at the same time you putting aside a small fund for your emergencies.