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Is Your Emergency Fund Too Big?

You've been diligently setting aside money every month to cope with life's unexpected events, and then one day it occurs to you that your emergency fund might be getting too big.

Can that happen? It's a question that one Fool recently posed to the Fools and Their Money discussion board. And the question elicited some good advice from fellow savers.

The general recommendation suggests that everyone should have at least three to six months worth of expenses saved someplace safe but easily accessible, just in case of job loss, major medical emergency, or natural disaster. It's up to each individual to tweak that suggestion to fit his or her personal circumstances.

If you've ever been knee-deep in an emergency, you may wonder whether it's even possible to overfill an emergency fund. Unfortunately, you can't really know whether you've stockpiled enough until something actually happens.

At a certain point, however, your emergency fund will get big enough that you'll wonder whether you can put some money to better, or more profitable, uses. When you start pondering whether you have enough or even too much, it's time to look at the bigger context, several Fools at the board said.

If your emergency fund is the only financial asset you have in case of a serious or long-term financial problem, you may be better erring on the side of having too much. The financial consequences could be more dire if you started to run out of emergency funds without any alternatives to fall back on.

If you have a pretty big portfolio of assets, such as a home, stocks, or mutual funds, you may feel pretty secure keeping just enough money in cash or its equivalent to cover minimal expenses for those three to six months. Although it might not turn out to be ideal timing if you're forced to borrow against your house or liquidate your investments, you at least have that option if things turn out to be worse than you'd hoped.

You might also ask yourself these questions when trying to determine whether you've overfilled your emergency coffers:

Do you prefer the safety of savings over riskier investments? Emergency funds exist to keep us feeling safe. The money we save in them gets stashed someplace very safe. All of this safety can make you feel, well, pretty safe. But it also comes with a cost. Money invested in the stock market stands a pretty good chance of outperforming the yield on your savings or money market account over the long haul. It's riskier, but you stand to gain more. You'll want to balance the goals of short-term safety and long-term gain.

Has your e-fund been on autopilot? If you've been automatically funding your emergency fund every month for a long time without paying much attention, it might be time for a reassessment. Remind yourself of your original goal. Ask yourself whether your circumstances have changed enough to warrant revising the goal. Then, see whether you've reached your target.

Do you have a better use for the money? Being dogged by creditors while trying to find a new job in a shaky economy isn't anyone's idea of a good time. In preparing for a potential emergency, you may want to include paying off some of your debts, such as car loans or student loans, so that you have one less thing to worry about in the event of an emergency. Or you may want to factor your debt payments into your emergency savings plan.

Has your financial, family, or work situation changed? When building an emergency fund, we typically plan for the worst-case scenario. If you have children, if your chosen profession seems unstable, or if you have a lot of financial commitments, you may want an extra margin of safety with your savings. All those situations can change, though. It may be time to reassess once the kids have left home, you've paid off the house, or you're no longer worried about a job loss.

Can you sleep at night? Though hardly a scientific yardstick by which to measure your emergency savings, it may be the most important. You'll want to be able to rest assured that your emergency bank account will provide enough if you need it.

Related Foolishness:

To learn about the best options for making the most of your emergency-fund savings, take a look at The Motley Fool's Savings Center. You can find out more about how much to save and what short-term investments produce the best returns on your money.

Fool contributor Mary Dalrymple welcomes your feedback. 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 4:11 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. As the policy grows, the cash value and the death benefit both increase, and if needed I can use some of the stored cash value for living benefits, such as paying for college or weddings or cars. 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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