Invest First or Emergency Fund First?

Hello My Young Friends, I was recently asked which a person just starting out should do: invest first or emergency fund first? Well, that is a very good question. If you think about the purpose of emergency funds, that will help you easily understand which comes first and why. So, let’s get to it. 

Invest First or Emergency Fund First? Well, What Is The Purpose of an Emergency Fund? 

Just when you least expect it, something can go wrong. You could experience a fire, a flood, a car mishap, or an illness. Not only are these things unexpected, but they are also things that may not be covered by insurance. That is where an emergency fund comes in. An emergency fund is a savings fund designed to help you get through urgent situations. 

Before I move on, let me point out examples of what is not an emergency. Going out to eat, buying tickets to a concert, or buying a birthday gift for someone, are not emergencies. So, for these situations, don’t touch that money that is designed to be there when you need it in a crisis. 

Invest First or Emergency Fund First? 

Now that you know the purpose of an emergency fund, let’s think about whether to invest first or build your emergency fund first, and why? Once you have started on your investment journey, like buying a rental property, or building your taxable investment account, you don’t want to derail your journey by needing to take money out of your investment. But the reality is, when you have an emergency like needing to replace your car, or fix a leaking roof, the money has to come from somewhere. (There is one exception to the emergency fund first rule: You should always contribute at least a little to your retirement account. This is especially true if your employer matches any portion of your contributions.)

If you do not have an emergency fund, it likely will need to come from an investment. So, to avoid that situation, it is best to build your emergency fund first.  

How Much Should Be Kept In An Emergency Fund?

Your emergency fund needs to be enough to cover common emergencies. Some common emergencies include new car batteries or new car tires, medical deductibles, or unexpected and necessary home repairs. To be able to cover these types of emergencies, I like to start with at least $2000 in an emergency fund. 

After I reach this emergency amount, I would then start putting small amounts of money into investments. However, we need to keep in mind that one of the biggest emergencies that we can face is the total loss of income. Therefore, I would keep heavily focusing on my emergency fund until I had at least 6 months of living expenses. At that point, I would slow down (but continue) my additions to my emergency fund. 

Once I had the six months emergency fund, I would start putting extra money into paying off debts. At the same time, I’d still add small amounts to my emergency fund (and continuing to also put small amounts into your retirement fund). 

Ultimately, before age 50, I would want to have a one year emergency fund.  This might sound like a lot of money. But, you never know when you might lose your job. It could be hard to find a new job, especially during times when the economy is not doing well. 

Where to Keep Your Emergency Fund?

An emergency fund should be kept separate from your other money. (You don’t want to have it mixed in with your monthly bill money, where you may be tempted to dip into it.) But, at the same time, it should be kept easily accessible and liquid. (You want to be able to access it quickly, therefore you don’t want it tied up in investments.)

In my opinion, the best place to find these 3 attributes is in a high yield savings account.

In addition to satisfying those 3 qualities, a high yield savings account offers a higher interest rate than a traditional savings account. High yield savings accounts can be found at online savings banks, which can offer the higher yields because they save money by not having to pay for brick and mortar facilities. 

The best way to get your deposits into your emergency fund is to have the money automatically and regularly withdrawn from wherever you have your paycheck deposited and deposited into your emergency fund account. 

Also, if you do have to use some of your emergency fund, be sure to replenish it as soon as possible. You never know when another unexpected stroke of bad luck may occur. 

(I had a time in which I injured my knee, and then approximately a week later, while someone else was driving my car, my car was totaled.) 

Invest First or Emergency Fund First? Key Takeaways 

• In emergency situations, an emergency fund acts as insurance for your other money, preventing you from having to dip into the other accounts.
• It makes sense to focus mostly on your emergency fund first before focusing on investing.
• $2000 is a good amount for your starter emergency fund goal.
• A second level emergency fund goal is 6 months of living expenses.  
• Ultimately, a one year emergency fund is a good goal for those under the age of 50. 
• Your emergency fund should be kept separate from your other money.
• Emergency funds need to be easily accessible and liquid to make them useful in emergencies. 
• High yield saving accounts are great places to keep your emergency fund. 
• If you do use your emergency fund, be sure to replenish it as soon as possible, to make sure that you are prepared for the next emergency. 

That’s all for today. 

Remember, the possibilities for emergencies are endless and unpredictable. Even if you can’t imagine what emergency could befall you, be prepared for that eventual bad luck that will strike. Get that emergency fund built.

Hugs & Wishing You a Productive Next 12 Months, 

Rich Mom

Who is Rich Mom? 

If you stumbled upon this post and you are wondering who Rich Mom is, check out my “About Rich Mom” page. 

Also, please note: I am not an investment advisor. Always do your own due diligence and research before investing. Check with your own investment advisor. 

Also, remember that past performance is not a guarantee of future performance.

The information shared here is not intended as financial advice, just entertainment and entertainment.