Can your emergency fund ever be too big?
Author: Christy Bieber
Source: The Motley Fool
You can't ever have too much money saved, right? Keep reading to see why that's not always the case.
Saving up money for emergencies may be one of the best decisions you ever make. After all, surprise costs can crop up in everyone's life. And being unprepared for them could mean you end up in credit card debt or struggling to stick with your budget.
In general, most financial experts recommend that your emergency fund should have enough money in it to cover between three to six months of living expenses. But in some cases, you may decide you want to save even more.
If you're considering building a really big emergency fund, though, you need to ask yourself if it's possible for your rainy day fund to be too big.
In some cases, having too much money saved for emergencies may seem like a good thing on the surface, but there are a few possible problems with socking away tons of cash in your bank account.
Here's what you may want to consider before deciding to grow your emergency fund.
Some of that excess cash could be put to better use
If you have a lot of money sitting in a savings account for emergencies, chances are good that you'll be earning interest at a very low rate. And, it is very unlikely that you will earn enough to keep up with rising inflation. In other words, that money sitting in your savings account will start losing buying power and won't be worth as much in real terms.
Now, that's almost always the case when you put money into a savings account. But it still makes sense to keep your emergency fund in savings in case you need access to your cash in a hurry. Plus, you don't have to worry about losing it. However, once you start keeping much more in an emergency fund than you'd feasibly spend even in a major emergency, then you may reach a point where you're needlessly letting your cash lose value.
You also need to consider the opportunity cost of an emergency fund that's too big. Money in your emergency fund can't be invested, so you're giving up the chance to potentially earn a much higher rate of return on it. This could make it harder for you to accomplish other financial goals that you might have for yourself. Also, you can't spend it, so you won't be using the fruits of your labor to enjoy life.
If you have tons of money and are able to build a huge emergency fund, while still investing plenty for the future and spending on the things you want now, then it may not be a big problem to just stick a fortune in an emergency fund. Especially since in this scenario, it wouldn't matter as much that your money was losing buying power.
That's not a reality for most people, though. So rather than "wasting" your money by leaving too much of it sitting in the bank, take the time to figure out how much it really makes sense to save for emergencies. Anything above that amount, consider investing in other assets instead. Doing so can help you build wealth that gives you far more financial security than having a large emergency fund ever could.
If you think it’s time to consider redirecting some of those savings into other assets, Fidelity investment finder can help you find the investment product that’s right for you.