Comments on: Treat Your Emergency Fund Like an Insurance Policy

By: Clay

Clay — Thu, 07 Apr 2011 15:37:09 +0000

Solid post. I am an insurance agent and a Financial Peace graduate/coordinator and was recently emancipated from my own student debts (I am also from Orlando, so the similarities just seem to keep piling on). I discovered your blog as I was searching for alternatives to my current emergency fund parking spot: bank Money Market @0.02% apr. While many short-term bond mutual funds have never had a negative return (and are thus a tempting alternative), your article reminded me that liquidity is a non-negotiable for these funds.

My employer frequently recommends putting half of the emergency fund in a highly liquid account (money market or savings account) and the remaining half in a conservative fund (typically with a liquidity period of 3 to 5 business days).

While we are thinking about emergency funds as insurance policies, we ought to consider the regular contributions to be made (similar to premiums) for increases in living expenses and inflation. Instead of taking on risk to earn interest, perhaps contributing a “premium” of 5% each year would be more in line with the emergency fund’s purpose.

By: dennyc

dennyc — Tue, 25 May 2010 22:42:19 +0000

I treat my emergency fund like a line of credit and any money I use becomes a debt, just like a credit card charge. In addition to any money paid back, I also add money to my “credit line” each month so it is constantly growing. It is much easier to be your own banker.

By: author

author — Sat, 23 Feb 2008 16:03:19 +0000

Yes, you are right. It’s NEVER a replacement for other insurances, unless you are wealthy enough to self-insure your home, but you’re never wealthy enough to insure liability against yourself. Great comment.

By: Cheufong

Cheufong — Sat, 23 Feb 2008 12:38:19 +0000

I agree with you!
Emergency fund is just that – emergency funds, much like insurance policies. Returns doesn’t matter, liquidity is what counts.
Only thing is, I feel that regardless of whether or not you own a home, a healthy emergency fund size should be about 3 to 6 months of expenses. If I don’t own a home, I’d probably still have to factor in rent.
However having an emergency fund doesn’t mean that insurance policies are not redundant. It’s still handy for major disasters like a total loss of ability to work at all.

By: Randall at CreditWithdrawal

Randall at CreditWithdrawal — Thu, 21 Feb 2008 20:11:41 +0000

What with the Fed reducing the prime rate and most banks following lock-step with their OWN interest rates, it’s hard to find any place that pays hardly anything for parking your money at.

Even a lot of money market accounts aren’t paying more than 4% or so.