The pandemic has inspired a lot of people to pad their emergency savings. Here's why I'm not doing that.
Ever since I started earning an income, I've made a point to consistently put money into my savings account. This means that when I was 13 and my only source of income was babysitting, I made sure to put the money I earned into the bank. And once I got older and, thankfully, started earning more than a babysitter's wage, I padded my savings enough so that if I lost my job or encountered a large unplanned expense, I'd have cash reserves to fall back on.
By the time the pandemic hit, I had a nice amount of cash tucked away in the bank, but the health and economic crisis spooked me. With schools being closed, I didn't know how much work I'd be able to do in the absence of childcare. And I also didn't know if my income would take a hit, what with the economy being in shambles. So around this time last year, I started adding to my savings, even if it meant cutting back on smaller luxuries that probably would've made the pandemic easier to cope with, like more takeout meals.
At this point, however, I have no plans to put any more money into my emergency fund. Here's why.
A fine line between being cautious and being paranoid
As a general rule, we're told that an emergency fund should contain enough money to cover three to six months of living expenses. My emergency fund has more than a year's worth of expenses. And that's exactly why I'm done adding to it, at least for now. Here's a widget that can calculate what your emergency fund should be.
Part of the reason I like to have a year's worth of living expenses in the bank is that as someone who's self-employed, I'm normally not entitled to unemployment benefits should my workload decline or go away. (Though right now, that type of aid is available to freelancers and gig workers as a specific provision due to the pandemic).
But here's why I think I can stop funding my emergency savings now. As mentioned, I have a little more than a year's worth of living expenses in there already. And also, if I were to lose my job, my household wouldn't necessarily lose all of its income. My husband also works, and his salary covers a lot of our expenses. And I guess I'd like to be optimistic and assume that we wouldn't both somehow lose our jobs at the exact same time. Even if that were to happen, as a salaried employee, he'd get unemployment, and possibly some severance, too.
Making sure my money is working for me
Another reason is that if I leave too much money in my savings account, I'll limit my ability to grow wealth. Right now, savings account interest rates are abysmally low, and the more money I keep in cash, the more that money stalls. On the other hand, if I keep adding to my brokerage account, I'll have an opportunity to invest that money and grow it into a larger sum.
A big reason I've historically erred on the side of having a larger emergency fund is that I'm a cautious person when it comes to finances, and I'm also the type who hates the idea of debt. But there's a difference between being cautious and being needlessly worried. At this point, I have a nice cushion of money to tide me over in an emergency, and I can sleep at night knowing that at least for now, I've saved enough.
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