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You Need An Emergency Fund Despite Inflation

emergency fund

Emergency funds

The emergency fund is not dead, even for those Financially Independent. You see, my car broke down on Tuesday. As I was driving down a thoroughfare, I heard an odd noise and pulled over.

Sure enough, after popping the hood and noticing my engine idling poorly, the check engine light came on and began to flash. So, I shut my car down and called roadside assistance offered through one of my many credit cards.

Despite an annoyingly long wait for a tow truck to arrive, I never once was stressed out or panicking. Why? Because I have an emergency fund.

You see, I don’t have to worry if stocks are up or down, nor whether I can afford to fix my car. Instead, I have cash set aside for events like this that don’t require panic or anxiety.

I often see all over Twitter and other financial media how inflation is causing people to reassess where they keep their savings. While this is an excellent idea for cash that you do not need and risk is tolerable, an emergency fund is specifically meant to be needed, and no risk should be tolerated, even if it means eroding your purchasing power.

Some argue that emergency funds are optional when you amass enough money as the opportunity cost of not investing is too high. I demur from such sentiment.

You see, I am a firm believer in a modest emergency fund. Not an extravagant one that can cover every emergency, as that would be ludicrous. Instead, three to six months of cash set aside should be more than enough to get you through a rough spot in most situations; an insurance policy of sorts.

Personally, I keep three months of cash set aside at any given time that covers my whole budget. But, if an emergency were to happen, I would modify my spending habits as life is not static but fluid. Thus, I could easily make three months last for five-plus, then liquidate my investments if things become direr.

And yes, while my emergency fund is losing money to inflation and missing out on stock market gains, that is okay. I don’t stay up late at night worrying about forgone gains, nor do I worry about if the market crashes. I also don’t care about inflation that is either transitory or here to stay.

Instead, I rest assured knowing that I have an insurance policy that keeps me secure and at ease, and as such, that far outweighs any gains or devaluing of my money that otherwise could and will occur.

And while my car is still in the shop waiting on a diagnosis – the labor shortage is real – I know that I can easily cover whatever the cost, even if it means replacing my car. After all, I always buy used and pay in cash, meaning that my car never costs more than 15% of my annual income.

So, how much do you keep in your emergency fund, and why do you have it there? Let me know in the comments below, and as always, have a great day!

FAQs

What is an emergency fund?

An emergency fund is a pool of money you have designated to cover unexpected expenses. Generally, it consists of at least three months of expenses in case you get laid off or have major expenses occur.

How much money should be in your emergency fund?

Three to six months of expenses should be kept in your emergency fund.

How much should I put in my emergency fund per month?

As much as you can afford until you have at least three months of living expenses set aside. Once you have reached this goal, you can decide to increase it to six or stop saving in the account.

Is a $1000 emergency fund enough?

$1,000 for an emergency is better than nothing, but most people will need more than this amount to help them cover the loss of a job or a major medical bill.

Why do I need an emergency fund?

You need an emergency fund since it allows you to take risk elsewhere in your life. By utilizing one, you can fall back on it when things go awry.


Mile High Finance Guy

finance demystified, one mountain at a time

mile high finance guy





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