A reader comments on last week's The Stoplight Rule For Creating An Emergency Fund post:
Define "emergency fund." What if you have "over-saved" for retirement, as in: "I will be wealthier in retirement than before retirement." Does continuing to put more money into a retirement fund constitute an emergency fund, but one that actually has returns? I've always been bugged by putting money in a place with no substantial returns (like a savings account).
Further, how do you compensate for the job stability you have (or do not have)? I'm extremely income stable (benefit comes with lower than market value income). Shouldn't there be an adjustment in how much should be saved/available?
I'll take these questions in reverse order. If you really have a stable, un-loseable job, yes, you can get by with fewer months of expenses in your emergency fund. Just promise me that you aren't rationalizing this decision. :)
Your first question, however, is the wrong question. Two things:
1) Putting money into retirement accounts (like an IRA or a 401k--in other words money you won't have access to for many years) cannot be equated to having an emergency fund. No way.
Emergency funds are:
* liquid funds in a money market fund or in a checking/savings account,
* not put at risk, and
* funds you can access instantly, or near instantly.
2) Yes, it may bug you to have money set aside that is not earning "substantial returns." Many, many retail investors say this. The problem is, this is simply not the purpose of emergency fund money. Don't confuse investment funds with emergency funds.
Finally, quite often there are times when it is literally priceless to have a lot of extra liquid cash--even beyond a generously funded emergency fund and a generously funded retirement fund. See, for example, the 2008-09 crash, the spontaneous 15% selloffs we had mid-year in both 2010 and 2011, or the interest rate spike in 2013 that sent most medium-term and long-term bond funds down as much as 15-20%. I encourage you to read some of Warren Buffett's writings [free PDF] for more context on this idea.
With our investments here at Casual Kitchen, I *always* stay more rather liquid than less, and accept that, sometimes, I'll be "missing out" on some incremental returns. That is simply the cost of safety.
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