Do I Really Need an Emergency Fund?

There are many articles out there that seem to suggest you’re dooming yourself if you don’t have some kind of emergency fund. And, in general, people tend to claim that you should have about three or even six months’ worth of living expenses saved up to form that fund.

Yes, you should have savings. And no, an emergency fund isn’t exactly a bad idea. But you shouldn’t underestimate such a task: three months’ worth of living expenses? That will take you a long time to build.

Before you make a decision regarding an emergency fund, here are a few things you should keep in mind.

Focus on clearing debt

Big debts are more widespread than ever right now. When you consider the tremendous student loans, as well as mortgages, it becomes clear that we live in a time where a lot of people who aren’t very rich are probably living in some kind of debt.

That doesn’t mean that debt is making our lives a nightmare, exactly. A lot of us can handle it. But trying to build up an emergency fund as though it’s the most important thing on your financial agenda is just going to make things more difficult. Before you pursue such a goal, pay off your debts.

Remember your other options

When emergency hits, you’re not exactly doomed if you don’t have an emergency fund. Let’s say you’re injured. Many emergency fund advocates would paint a picture that sees you flooded with medical bills that you can’t pay – if only you’d listened to them and saved up three or six months’ worth of living expenses, right? But medical bills can be dealt with smartly, if you know how the industry works and where to negotiate. Besides, if the injury wasn’t your fault, then you can look into something like PISD support to get compensation.

Again, this isn’t to say that you shouldn’t have some savings. But it might be better to focus on improving your credit, so that you’re better able to get a loan should something bad happen. Clearing your debts will help you do this, as will being smarter about your credit card use. Putting yourself in a better position to borrow money may help you in many more ways than the building of an emergency fund will.

Don’t be too pessimistic

Here’s something that really fuels people’s desires for an emergency fund: the fear that their source of income is one day going to be cut off. In other words, they’re afraid that they’ll lose their jobs one day, and that this may very well coincide with some emergency that requires a lot of cash.

Yes, unemployment is something that can really drag people down, both emotionally and, in some cases, financially. But not only is involuntary termination nowhere near as common as anti-free-marketeers would have you believe, but the fact is that the employment rate in both the UK and the US is at about 95%. In other words, even if you do lose you job, you’re probably not going to be unemployed for very long at all. Remember this before panicking about your long-term funds.