What about emergency fund?

Emergency fund is for Emergencies

captain obvious

Russian Captain Obvious is watching you


I think Captain Obvious would be proud of me if he read this quote. Let’s do it one more time.

Emergency Fund is for Emergencies
© Friendly Russian

Recently I spoke with a friend of mine about having a good, solid emergency fund for 5-6 months of expenses and he asked me why didn’t we invest this money. “It’s $30K sitting idle and doing nothing. You should invest them in mutual funds or bonds”, he said.

And he made me thinking, I started doing some research and analysis of different Mutual Funds and Bonds that would work for my Emergency Fund. But after a couple of days of thinking it finally hit me that emergency funds are not for investment, they are not supposed to make you any extra money.

Emergency Fund is not for investment, it’s for Emergencies.

It’s really easy to get into this trap, especially when you have a big chunk of money that could’ve been invested and make you more money. My emergency fund is rather an insurance for me and my investment. And the difference between investment and insurance is primitively easy:

Insurance costs you money. Investment makes you money.

I buy car insurance, hope you too, and it cost me $710 per year. Every time when I push

emergency fund

“Rainy Day” fund is called “Dark Day” In Russia

“Pay” button, a small investor sitting on my shoulder is crying. But the reason why I spend $710 every year on car insurance is really simple – I cannot afford another car right now if something happens to my vehicle. If something happens to my car, I cannot afford to spend $8-10K on a “new” car. It’s too high percentage of our current net worth. And I transfer a risk of getting my car damaged or stolen, from my pocket to an insurance company. Car insurance protects your vehicle(s) and your pocket. But it costs you money.

The same with health insurance, can we just stop paying $214.96 every month for health insurance and invest these money instead? Sure we can, but we will not. Why?! Because there is a risk involved, risk of being bankrupted after getting one of these fat and ridiculously huge medical bills. Health insurance protects us and our money including money we’ve invested. But we have to pay for this protection

Insurance costs you money.

And when I take a look at our $30,000 emergency fund I see an insurance policy. Insurance which is aimed to protect my family is in case of emergency. But WHY?! Why don’t I invest those money? There are short-term bonds from 6 months to 1,5 years. What can happen in 6 months or 1,5 years? Exactly – nobody knows WHAT and WHEN it is going to happen. But if it happens then it goes in the worst possible time you could have imagined. Either the market would be down, or you would have to pay early withdrawal fees.

It’s really hard to beat a Russian wisdom that have been said more than two times, and I’ve already said it more than enough – Emergency Fund is not for investment. It’s for Emergencies.

Of course, we could’ve lowered our emergency fund from 6 months to 3 months rate, but, to be honest, we would not feel confident knowing that we have only 3 months worth of expenses.

And what about you? Do you have emergency fund and if you do, where do you keep it?

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10 Responses to What about emergency fund?

  1. I keep my emergency fund lean by putting a portion of it into a CD that rolls over every six months. It prevents me from investing it, but having two months of expenses in a CD allows me some protection with minor, actually very minor, interest accumulation. If I break it I lose the interest, but heck its only a couple bucks anyway.

  2. I definitely have an emergency fund and I too look at it like insurance. I try not to worry about all the money that I could make if it were invested but I figure if I don’t do that with health insurance why do it with my emergency fund 🙂
    Mustard Seed Money recently posted…The One Skill That Will Boost Your Income By 50%My Profile

    • Good to know that I am not alone 🙂 And it’s a great felling to know that if something happened you have a pillow that will protect you and your family for a some period of time, isn’t it?

  3. You’re absolutely right about your emergency fund! You should be able to sleep better at night knowing you have it, and a good night’s sleep is worth quite a bit.
    Passive Income M.D. recently posted…I’m Financially Independent! If I Move…My Profile

    • Amen!
      Thanks for stopping by PI M.D.
      I absolutely agree with you, when I know that if something happens we have 6 months worth of our current spending in emergency fund, I less worried about emergencies. I more focused and concentrated on important things: family, investment, our future.

  4. Sean says:

    Many people do not even have an emergency fund! I think it is absolutely insane how careless people are with their personal finances.

    Excellent article!
    Sean recently posted…Make a Cash Envelope System Wallet with Printable TemplateMy Profile

    • Hello Sean,

      Thanks for stopping buy. We used to be like many people and didn’t have an emergency fund. Sometimes people have no idea that they could live better, smarter, wiser you name it.

  5. Jacq says:

    I’ve been working on getting comfortable with having less in my savings to put more into investments. I set up an automatic deposit into my Roth, for a small amount. Money put into a Roth is post tax, so it can be taken out if you really need it. At the same time I try to think of money I have at Vanguard as ‘untouchable’. I usually do a 1x a year Roth contribution ‘in case’ I need the money otherwise. I’m trying to ‘let go’ of that idea too. I have -enough- in my savings. 🙂
    Ultimately emergency funds are personal and you have to do what makes you comfortable.

    • Jacq, thanks a lot for stopping by.
      You’re absolutely right saying that emergency funds are personal and you have to do what makes you comfortable. That’s why we call it personal finances. Because every case, every situation is personal. But at the same time, having less in EF just to have more in investments opens you a small, very small but still a chance to withdraw money from your investments.
      If it works for you, good to go. But in our case, we would feel awful if we have to touch our investment money.

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