Do you really need an emergency fund?

If you have read anything pertaining to personal finance. you’ve probably seen the old, “You need an emergency fund!” But do you really? If you're like most people, you might wonder if it’s just another piece of financial advice that sounds good but doesn’t apply to your situation. Let’s take a closer look.

An emergency fund is a stash of money set aside for unexpected expenses—think car repairs, medical bills, or even losing your job. It’s not about splurging on a surprise vacation or upgrading your gadgets (tempting as that might be). It’s your safety net for life’s curveballs.

Now, you might say, “I have a credit card for emergencies.” Fair point. Credit cards can be helpful, but they come with high interest rates and the risk of racking up debt. Paying for an unexpected $1,000 expense with a credit card can turn into a much bigger headache if you can’t pay it off quickly.

Growing up, it was instilled in me as soon as I got my first credit card, that you didn’t charge more than you could pay off each month.  An emergency can throw that rule out the window.

So how much do you really need in an emergency fund? The classic advice is three to six months’ worth of living expenses. For some, that feels as achievable as climbing Mount Everest. If saving that much seems overwhelming, start smaller. Even $500 or $1,000 can make a difference and keep you from resorting to debt for minor emergencies.

Let’s be honest, building an emergency fund isn’t glamorous. This money should never be invested. Good options for an emergency fund are a savings account or separate checking account. 

Question. Which of these three examples constitutes an emergency:

1.      Mary’s 8 year old car needs a new transmission.  Since she has only 40k miles on her car, repairing her car makes sense.  She has 15k in her emergency fund, she can cover this cost.

2.     Bill’s water heater needs replacing and at a cost of $2,000, his emergency fund covers this cost.

3.     Carl’s 18 year old son wants to go to Hawaii as a graduation present at a cost of 6k.  Carl has 8k in his emergency fund so he could cover this cost.

Answer. 1 and 2 constitute true emergencies.  As much as it would be nice for Carl to give his son the gift of 6k, it doesn’t fit the definition of a true emergency.

And what if nothing “emergency-worthy” happens? Well, that’s a good thing! Your emergency fund can sit there quietly, ready for whatever life throws your way. Think of it as peace of mind with a price tag you control.

So, do you really need an emergency fund? Only if you like sleeping better at night, knowing you’re prepared. It’s not about expecting the worst but being ready for the unexpected. And that’s a kind of security money can’t buy—unless, of course, you’ve saved it ahead of time.

Have you had a situation where an emergency fund came in handy?  Feel free to share your story with us.

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All the best.

Rick Fingerman, CFP®, CDFA™, CCPS®

617-630-4978

Rick@PlanWithFPS.com

Financial Planning Solutions, LLC (FPS) provides this blog for informational and educational purposes only. Nothing in this blog should be considered investment, tax, medical, or legal advice. FPS only renders personalized advice to each client. Information herein includes opinions and source information that is believed to be reliable. However, such information may not be independently verified by FPS