Is bigger better? As we all know (ahem), NO! Or at least not necessarily.
Firstly, by stashing away more than you need, there is a potential for lost opportunity. For example, could the fund be reduced by 25% and the difference invested where it has the potential for greater growth?
Secondly, one of the pre-requisites of an Emergency Fund is that it is easily accessible. For that reason, many people plump for a current or instant access savings account. Easy to get at maybe, but that usually means low-interest rates. As a result, you could be missing out on opportunities where your money could be working harder for you and earning more.
And lastly, when savings are held in savings accounts what interest rates lower than that of inflation, the value of your money is being eroded over time.
It’s what you do with it that counts!
For these reasons, beyond the three to six living expenses point, bigger is NOT necessarily better. Do the sums and assess your tolerance for risk and personal circumstances.
But for most people, any more than six months’ giving expenses represents missed opportunities. This could slow down the path to achieving your financial goals. It’s a balance. And if you find yourself going above this amount, perhaps revisit your money mindset and work out why. It’s often driven by fear.
How much money you stash in your Emergency Fund is down to your personal circumstances and appetite for risk. Just remember to revisit this and adjust according to your situation or economic environment.
Here’s to financial fitness.