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Why Do I Need an Emergency Fund?

The following video is part of our "Motley Fool Investing Basics" series, in which Motley Fool contributor and financial planner Dan Caplinger discusses topics from around the investment world.

Today, Dan looks at the importance of maintaining an emergency fund to cover unexpected expenses. Although rules of thumb suggest that having enough money to cover three to six months of expenses is ideal, Dan believes that you have to balance your need for having cash available in a pinch against missing out on better long-term investing opportunities. In particular, with many employers offering 401(k) matching contributions, taking some money that you'd otherwise put in an emergency fund and instead putting it in a 401(k) may allow you to get essentially free money from your employer. Dan finishes by recommending that even if you can't put huge amounts into an emergency fund, every penny counts and can help you avoid getting into a financial hole that's nearly impossible to get out of.

Once you have your emergency fund set up, the next step is figuring out a strong long-term investment plan. Our special free report "3 Stocks That Will Help You Retire Rich" can help, with general advice along with specific guidance on some promising stocks to build wealth. Click here to keep reading.

Fool contributor Dan Caplinger has no positions in the stocks mentioned above. The Motley Fool has no positions in the stocks mentioned above. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.


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Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On July 26, 2015, at 4:03 PM, coffeedoc1 wrote:

    I designate the excess cash value in my blended whole life insurance policies to be my emergency fund. I can have the money sent to me in 5 business days (any more urgent need can be floated on a credit card until the Insurance check arrives and then paid off before interest accrues). If the emergency is of a short term nature, I can take the insurance money as a loan to be paid back after the emergency has passed (with a differential interest rate of only 0.7% between what the insurance company charges me and what they pay me on the cash value in my policy). If the emergency is permanent, I can take the money out of the policy as a withdrawal, which lowers the total death benefit a little but does not have to be paid back. Meanwhile, the cash value in my policy can never go down with the market and earns 3.5-6.34% (depending on the policy) per year, year in and year out while I am not having emergencies - beats any bank savings account or CD and even beats the safety and returns of most bond funds or even dividend funds (which often yield less than 3.5% and can go down with market fluctuations.) Safe, secure, liquid and has the added advantage of providing death benefit to my family. In my opinion it gives the ultimate peace of mind and is the perfect place to hold emergency fund money. coffeedoc1

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Dan Caplinger
TMFGalagan

Dan Caplinger has been a contract writer for the Motley Fool since 2006. As the Fool's Director of Investment Planning, Dan oversees much of the personal-finance and investment-planning content published daily on Fool.com. With a background as an estate-planning attorney and independent financial consultant, Dan's articles are based on more than 20 years of experience from all angles of the financial world.

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