Welcome to the first reader question post on Making of a Millionaire. My goal with Making of a Millionaire is to have meaningful discussions about money so I hope this is the first of many columns. I don’t pretend to have all the answers but I hope these columns can motivate you to ask tough questions about your money.
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Q: I am 35, & married with two kids. We have about $30,000 in cash in case of emergency. My wife and I both have good job security so lately, I have been thinking of investing that $30,000 & put it to work for us. I feel like that money is being wasted, what are your thoughts on investing your emergency fund?
A: Thanks for the question, William. I am familiar with the temptation you are faced with. I am actually in a similar situation as you. My wife and I have somewhere north of $35,000 in cash reserves.
Rather than keep it all in one account labeled “emergency fund” we keep significant cash reserves in a number of accounts for short and long term savings objectives.
Specifically, we have what you could call “itemized” emergency funds for financial surprises in a number of areas including;
- House fund. This is where we save money for unexpected household expenses like the leak in the basement we had to deal with last year.
- Second house fund. this is where we keep the money for unexpected expenses for our income property.
- Car Fund. This is where we save money for unexpected car repairs and to buy a new (or used) car when our current cars are ready for the junkyard. Our goal with this is to always have cash on hand for car repairs and to never have to take out an auto loan again.
- Vacation Fund. We only spend on vacation what we have in the vacation fund.
- Kid Stater Fund. (previously wedding fund). When we were saving for our wedding we each put $400 per month into our “wedding fund”. After the wedding, we kept putting $400 each into the account every month and called it our “kid starter fund”. This is the money we plan to use to replace a portion of my wife’s income when she goes on maternity leave.
- Emergency Fund. This is where we save for any other financial emergency that could come up like a job loss.
While we don’t keep all of that cash strictly in an “emergency fund” we could, of course, access all of the cash in our other savings accounts if an emergency were to come up. I would drain my vacation fund if I lost my job because I would not be planning any vacations until I got a new one.
I bring this up to point out that there is more than one way to think about your emergency fund.
Your question of whether or not to invest your emergency fund comes down to a cost/benefit analysis.
What are the benefits of investing your emergency fund?
- You would potentially increase your net worth.
- You would likely max out your tax-preferred accounts like IRA’s.
What are the costs of investing your emergency fund?
- You needlessly expose you and your family to financial risk. If the markets took a downturn at the same time you incurred a financial emergency you may have to go into debt to produce the cash necessary to ride out the emergency.
I want to highlight the fact that there is a high correlation between when the markets take a downturn and when you might experience a financial emergency.
If the markets take a downturn due to a recession or financial crisis, that is the exact time you are more likely to lose your job or be laid off.
You’ll have to decide this for yourself but in my view, you already have the most important and difficult part of a financial plan in place; access to cash in case of financial emergency.
To me, that seems like a great foundation to build on.
This article is for informational purposes only, it should not be considered Financial or Legal Advice. Not all information will be accurate. Consult a financial professional before making any major financial decisions