The whole idea behind an emergency fund is to protect the money you’re saving in your retirement plan. With six months’ worth of essential expenses in a high interest savings account, where the money is earning some return but is also easily accessible, you can put your retirement savings into more longer-term investment options to earn a potentially higher return.
And yet so few people have emergency funds. And even fewer recognize that they should only be used for extreme emergencies like layoff, illness or death.
No, needing new tires is not an emergency. That should have been a planned expense, and you should have accumulated some money in your car expenses fund to cover those new tires.
Covering the kids’ hockey fees and equipment costs also isn’t an emergency. It is only a lack of planning and foresight that would leave you scrambling for money to cover those costs.
While emergency funds are the first defense for your long-term savings, your savings’ saviour in the event that you do end up sick for any period of time would be disability insurance.
Statistically, at most ages there’s a one-in-three chance of becoming disabled for at least six months before the age of 65. Even more frightening, if your disability does last 90 days, the average length will likely be about five years. Holy mother! How much of your long-term savings would be left if you had to tap them for five years to keep yourself afloat?
The way to protect your savings is to have the other pieces of your financial puzzle in place to create the picture of financial security that you want to have. Leave a piece out of the puzzle and you could end up watching the whole thing fall apart.