If you frequently read articles, books and blog posts about personal finance – as is my unfortunate wont – you quickly stumble upon one of the sacred cows of the genre: “The Emergency Fund.â€
“The Emergency Fund,†the grown-ups tell us (as in this post that showed up in my inbox yesterday,) consists of 3 to 6 months of wages, socked away in a safe CD or savings account at the bank, untouched by regular expenses. Only when you stumble to the emergency room for your uninsured, unplanned, uninvited $5,000 appendectomy, or only when you lose your job and take 6 months to land a new one, are you allowed to dip into this account.
This sacred cow of personal finance, however, deserves to be cow-tipped at midnight. Because, mostly, its a complete load of bullcrap.
I’m not saying it’s a bad idea to have some ready money in the bank. Of course it is a good idea. Money in the bank is lovely. The idea is fine. But it stinks as a piece of personal finance advice.
In reality, there are three types of people, and none of these three types need the ‘Emergency Fund’ sacred cow advice.
Group One – You have money in the bank, (or stocks in the market, or a trust fund annuity, or whatever) without having been told. Maybe you were a fortunate beneficiary of the genetic lottery and tax code (The first $5.5 million inherited is tax free!), or maybe you just have a squirrel-like capacity for storing nuts. Good for you, but you really don’t need to be told about the Emergency Fund rule. The advice is irrelevant. You’re past that, you got that covered.
Group Two – On the edge of solvency, trying to make it through every month with all bills paid, but occasionally slipping into deficit. This includes about 50% of all Americans and 90% of Americans under the age of 30. This is the group to whom the “Emergency Fund advice†gets directed by the concerned grown-ups with a furrowed brow.
