How Important is an Emergency Fund?

By conventional wisdom, a strong emergency fund is considered a staple of good financial practice. The standard advice is to have 3-6 month’s worth of living expenses in a savings account that can easily be accessed when emergencies arise, such as periods of unemployment or unexpected medical bills.

But personal finance is personal, and the standard advice isn’t right for everyone. I’ve seen a number of different personal takes on why someone either does or doesn’t have a sizable emergency fund and today I wanted to share two in particular that stood out to me as being particularly thoughtful.

Building an emergency fund vs. paying off debt

Jacob from iHeartBudgets wrote a great piece this week explaining why he chooses to keep several thousand dollars in a savings account when he still has over $13,000 in student loans at 6% interest. You can read it yourself here: Is My Emergency Fund Too Big?

Essentially, by choosing to keep his money in a savings account that by my guess will earn him at best about 1% per year, he’s giving up the opportunity to get a 6% guaranteed return from paying down his loans. From a mathematical standpoint, using a big chunk of those reserves to pay down the loans is a no-brainer. Many of his readers thought so as well.

But here’s the thing. Good financial practice is not all about maximizing returns. There’s a place for that, but there’s also a place for sacrificing returns in the name of safety. When you start to look at Jacob’s entire situation, his logic for keeping the money in savings makes sense. Not only does he have a wife and a young child who depend on him, but they have another child on the way (congrats by the way!). This is a classic example of a situation where financial stability takes precedence over maximizing the return on every dollar. If he used his savings to pay down his loans, it’s certainly likely that he would end up with more money at the end of the day, but it exposes him and his family to greater financial risk if they were to hit a rough patch.

While there are certainly cases where paying down debts makes more sense than keeping a large emergency fund, I think that Jacob’s approach is perfect for his situation and is an example that many parents can follow.

The young, single person’s emergency fund

Mario at Debt Blag has a slightly different situation and therefore a slightly different approach to an emergency fund (though not quite as different as it might seem at first). You can read his take in full here: Why I don’t keep a lot of cash around in an emergency fund.

Mario’s situation is different from Jacob’s primarily in that he doesn’t yet have a family to support. For that reason alone, in the event of an emergency it would likely be much easier for him to dramatically slash his expenses than it would be for Jacob. He gives a great breakdown of exactly how he would do this, and the difference between his expenses now and what he could get to at the bare-bones level is pretty striking.

The other great piece of his article is how much thought he’s put into the alternatives to keeping the standard 3-6 month emergency fund. He’s paying down his student loans at an interest rate of 7.9%, an excellent return. He’s maxing out his Roth IRA, which in an absolute worst case scenario allows you to withdraw your contributions tax and penalty-free. He’s taking advantage of an employer match for his 401(k). He’s considered how he could not only slash expenses, but pick up some extra income in the event of an emergency. All of this thought has allowed Mario to give himself enough security to feel safe, but also take advantage of the opportunities that his situation is affording him.


I love these two articles because they are both incredibly thoughtful approaches from two very different viewpoints. Each of them has figured out what works best for their personal situation, which is really what personal finance is all about.

Here at Mom and Dad Money, I try to give you the tools that will allow you to manage your money effectively for your family. There are a lot of rules of thumb that serve as a great starting point, but in the end every situation is different. Financial success requires that you have a fundamental understanding of the principles in play and the strategies available to you. But then you have to evaluate your specific situation and pick an approach that work best for you.

Other articles I think you’ll like

The Pops: Along with Mr. 1500, Mrs. Pop breaks down the logistics of biking to work. I have to admit that while this is something that has always intrigued me, I’ve never taken the plunge. This article was really helpful though in terms of thinking about how it would work.

Financial Samurai: Sam has a cool breakdown of the impact of talent vs. effort in determining our success. The conclusion I like best is that if success is largely driven by effort, then the power to improve our lives is in our hands.

Cents and Sensibility: With all of the talk out there about finding a practical college major, could it be that a liberal arts degree is really the way of the future?

Thrift Genuity: LinkedIn can be a powerful way to build a professional network and bolster your career. How are you using it?

Budget and the Beach: How much are your habits costing you? What habits could you change that would improve your financial situation?

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31 Comments... Read them below or add one of your own
  • Laurie @thefrugalfarmer May 31, 2013

    Comment boxes have returned – woohoo! It seems our filtering service wasn’t speaking to Disqus. 🙂

  • Holly Johnson May 31, 2013

    Stuff happens- your dryer breaks, your car needs repairs, etc. These are some of the reasons that people need an emergency fund! I personally wouldn’t sleep well without mine.

    • Matt @ momanddadmoney May 31, 2013

      I wouldn’t either, but I do think there are varying levels of need. I really like both of these takes because they’ve clearly thought hard about the needs that their specific situations entail.

  • Pauline May 31, 2013

    I keep a limited EF too. With $1K I am more than happy because I am healthy, single, and the house is paid for. Maybe with a family it will be different but I prefer to invest for now.

    • Matt @ momanddadmoney May 31, 2013

      I think once your investments get big enough, and as long as they’re liquid and you’re ok with the possibility of selling at a loss, then the concept of a dedicated emergency fund becomes less relevant. You just have to be confident that your liquid investments, in a time of economic depression, could still support your cash needs for an extended period of time. It sounds like you have a stable situation that allows you to do this, which is great!

  • John S @ Frugal Rules May 31, 2013

    We like to have a bigger EF because we run our own business and life just happens. That said, you have to go with what your need is and many are just fine having only $500-1000 socked away.

    • Matt @ momanddadmoney May 31, 2013

      I’m in the bigger camp too. But as you say, different situations might call for different needs.

  • Grayson @ Debt Roundup May 31, 2013

    When I was in debt, I didn’t have an emergency fund, so now I have one and it makes me feel much safer. I have thought about sticking it in my Roth, but that is not as liquid as I would like. Each person is different, but I think as long as you are doing what works best for you, then you are all good. There is no one way because every circumstance is different. Using a blanketed approach does not work.

    • Matt @ momanddadmoney May 31, 2013

      Do you use credit cards? If so, you can put emergency expenses on a credit card so you would have time for the funds to come out of the Roth. I don’t love the idea of a Roth as an E-Fund, but if your choice is one or the other then I think the Roth is a great way to go. You just can’t get the opportunity to contribute back. And you can certainly invest in a money market fund within the Roth to keep your money safe.

      • Grayson @ Debt Roundup May 31, 2013

        I won’t use a credit card as an emergency fund. After being $50,000 in credit card debt, I only use them for my normal monthly purchases, things that I know will be paid off at the end of the month. I don’t believe that credit cards should be used as an true emergency fund.

        • Matt @ momanddadmoney May 31, 2013

          Oh I wouldn’t use a credit card as an emergency fund either. Let me clarify what I meant. You originally said that a Roth wasn’t as liquid as you would like for an E-fund, which I assumed to mean that it might take a few days to get access to the money. My proposed solution was simply to use the credit card for whatever emergency expense came up, only up to the limit of what you could withdraw from a Roth, simply as a means to buy yourself a few days for the money to come out of the Roth. No different from a logistics standpoint than using the credit card for normal monthly purchases and then paying the bill in full from your checking account. You’re only putting charges on it that you have the cash to pay off in full.

          Anyways, obviously you should use whatever system works for you and you clearly have a good reason for avoiding the overuse of credit cards. I also don’t like the concept of a retirement account as an emergency fund. I just recognize that you have a limited time period to make tax-advantaged contributions each year before that opportunity goes away forever. So if it’s an either-or proposition, I would personally consider keeping some small amount of cash in a regular checking or savings account and putting the rest into the Roth, hoping I never have to touch it but knowing it’s there if needed.

          • Grayson @ Debt Roundup May 31, 2013

            Yeah, I got you on that. I am not sold on using my Roth either. I don’t want to take that money out. I don’t even want to touch my Roth. Right now, my e-fund is in a savings account, but that doesn’t give you much earning potential. I don’t like that. I want my money to make more money, but stealing from my retirement fund is not ideal and I can only contribute so much per year to it.

  • DJ Wetzel May 31, 2013

    I am a saver, and always have been. So emergency funds are super important for me. I would choose to have a few thousand in one even with some other debts just to insulate myself from further harm.

    • Matt @ momanddadmoney May 31, 2013

      I think that’s a great strategy. I’ve seen Grayson and Johnny Moneyseed talk about that before. I love the idea of having savings even while paying off debt because if something does come up, you have cash to handle it rather than having to rely on more debt, which could create a vicious cycle.

  • Funancials May 31, 2013

    You nailed it when you said that personal finance is “personal.” The correct answer is usually going to be “it depends.”

    I have a large balance in my savings (over 2 yrs of mortgage payments), which I normally advise against. But, I don’t know what I want to do with it yet. Nowadays, there are so many safety nets in place that a HUGE emergency savings isn’t necessary. Assuming you’re sufficiently insured, I think $5000 would cover just about any “emergency.” If you lose your job, are you screwed? No. There’s unemployment benefits. If you get hurt, are you screwed? No. You have insurance.

    • Matt @ momanddadmoney May 31, 2013

      Unemployment benefits are certainly available, but for us they wouldn’t be enough to prevent a significant disruption in our lifestyle. I do agree that insurance is a great tool, and disability insurance is one of those things that almost all working people should have but almost no one does. The biggest things I consider by emergency fund available for are potentially huge medical bills that aren’t fully covered by insurance, and an extended period of unemployment. I don’t have either of these things fully insured, nor can I really, but my e-fund would at least cushion the blow.

  • Charlotte Baker May 31, 2013

    I love your balanced approach. As a single mom my emergency fund makes me feel confident and prepared for the unexpected. I want to be a good example to my daughter in this way and it makes sense for me to keep an emergency fund at this point in my life.

    • Matt @ momanddadmoney June 1, 2013

      First of all, mad props to managing as a single mom. It’s hard enough with two people so I’m incredibly impressed with anyone who can do it as one. I think having some kind of emergency fund is pretty much essential as a parent. It’s much different when you’re talking about the disruption to a child’s life in addition to yours. Sounds like you’re setting a great example.

  • The juxtaposition of Jacob’s and Mario’s situations is a great example of why a one-size fits all approach isn’t really productive. Great comparison!

    And thanks for the mention. I got caught in my first ever full on rainfall biking on the way home today (had sprinkles in prior evenings) and it was surprisingly enjoyable. It also helped that I had everything in baggies so wasn’t worried about my belongings getting wet. =)

    • Matt @ momanddadmoney June 1, 2013

      There definitely isn’t a single answer that applies to everyone. You can certainly find strong principles that are common between strategies, but the actual implementation will definitely be different for different situations.

      It’s kind of funny how often those things we try so hard to avoid (in your case a full on downpour) end up being totally manageable and even enjoyable when they come up. Glad to hear you’re still liking it!

  • MyMoneyDesign June 2, 2013

    Definitely agree. Your EF is all about how big of a castle wall do you want around your fort. It might look better on paper to use the money one way, but it might be more practical to go the other way with it. After my nightmare in April with spending $3500 on car repairs, I can express to anyone (especially those with a family): YES you do need to have a few thousand dollars set aside for the unknown. Stuff will happen!

    • Matt @ momanddadmoney June 2, 2013

      Wow, sorry about the car. Absolutely true though, stuff always happens. Maybe your EF doesn’t always have to be in a savings account, but having cash available somewhere to pay for the unexpected is a must.

  • Budget & the Beach June 2, 2013

    And while I don’t have a family to support, my freelance career is so up and down that I need a big e-fund to feel less stress if I don’t make a lot of money one or two months (although I really hope that’s not the case this year). My magic number is 15k, and would have almost had that if it wasn’t for my car repairs and shoulder treatments. But anything is better than nothing. So it’s up to the individual and their comfort level. Thanks for the blog mention btw!

    • Matt @ momanddadmoney June 2, 2013

      Some kind of buffer is definitely a huge help with up and down income. Glad to hear you had the money to pay for your shoulder treatments and that you’re back on the volleyball circuit!

  • I think you definitely need some type of an emergency fund. The amount can vary but in the end it should be whatever makes you feel comfortable if you were to lose your income.

    • Matt @ momanddadmoney June 3, 2013

      Agreed. Or as Mario put it really well in his post, you need an emergency plan. The “fund” could take any of almost infinite different forms, but some source of money and some kind of plan are definitely necessary.

  • cashRebel June 3, 2013

    Being a young, single guy, I know that my emergency fund it too big. Ever since March I’ve been slowly dollar cost averaging half of it into my investments. It’s going to do more good there than in my 1% savings account.

    • Matt @ momanddadmoney June 4, 2013

      As long as you have enough cash on hand to handle the big risks, then that sounds like a great strategy.

    • Matt @ momanddadmoney June 4, 2013

      Just found this article (below) and it made me thing of your comment. Small point but technically DCA is actually a sub-optimal approach to investing the entire lump sum at once. Since the market generally rises, you’d rather be in early to catch more of the rise on average. You’re also skewing your desired asset allocation by keeping more in cash. It’s a minor point and DCA is still a fine strategy, just thought I’d pass along the info since you seem to like learning the details on this stuff.

      • cashRebel June 4, 2013

        Matt, This is AWESOME! Thanks so much for pointing this out to me. I’ve always thought this could be true, but I’d never seen any concrete evidence… looks like I need to make some tweaks to my Vanguard account.

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