If there’s one thing all financial advisors can agree upon, it’s the emergency fund. At least, it used to be that way. Nowadays, there’s a difference of opinion brewing within the industry.
Some financial advisors have given up on the emergency fund, but they’re outnumbered by the experts who champion these savings. And in this case, it might be best to listen to the majority for the best interest of your personal finances.
What Is An Emergency Fund?
The emergency fund is a stash of cash that provides a financial backup when unexpected expenses outstrip your income for the month. You can tap into it any time you’re stuck repairing your car unexpectedly or rushing to the hospital for urgent care.
A general rule of thumb is to keep three to six months’ worth of living expenses in these savings.
What happens if you fall short of this goal before an emergency crashes into your life? According to the cash advance experts at MoneyKey, you may consider taking out a loan to cover your expenses. You can compare the cash advance loans offered through MoneyKey to other installment loans available online if your car breaks down unexpectedly or you need to take your cat to the vet without warning.
Think of cash advances as a Plan B to your backup — remember this, as it’s different for the $0 emergency fund fans.
Select Advisors Are Turning Their Backs On These Savings
Considering how rough the past couple of years has been on everyone, having a financial safety net sounds pretty good. So why do some financial experts recommend giving it up?
You can see this opinion featured in news sites like Forbes, Business Insider, and the Motley Fool. Popular blogging sites like Mr. Money Moustache and Early Retirement Now also advocate for keeping $0 in emergency savings.
Their reasons are many for opting out of an emergency financial fund:
• It’s too hard to save that much
• You don’t earn interest on short-term savings
• This fund is a temptation to use on non-emergencies
Emergency Fund Vs. Emergency Plan
Now, these advisors don’t believe you’ll never run into an emergency. They’re on the same page as everyone else, saying that it’s not a matter of if, but when something will go wrong. However, they advocate having a plan rather than a single savings account to help you with unexpected expenses.
A typical $0 emergency fund plan includes several helpful yet uncommon assets:
• An empty credit card or line of credit with a high limit
• A well-paying job that provides a considerable paycheck with a generous cushion of disposable income
• Real estate equity you can leverage into a new low-interest loan or line of credit
• Comprehensive medical, auto, and life insurances
Do you see a problem with this plan? Yep, you guessed it; these strategies come from a place of financial privilege.
If you aren’t raking in an enormous paycheck each month, you won’t have the disposable cash available to repair an appliance on the fly.
If you can’t afford health insurance, you can’t rely on coverage any time you need care.
If you’re carrying over a hefty balance on your credit card or line of credit, you can’t just put an emergency expense on this account.
Most of all it is controversial because it prioritizes borrowing as your first line of defense instead of using cash advances as the safety net they’re designed to be.
For all these reasons, the $0 emergency fund doesn’t work for most people. Saving your money is a far more accessible way to be prepared with liquid cash.
