7 Ways an Emergency Fund Makes You Wealthier

A rainy day fund. A safety net. There are many titles for an emergency fund, but you can consider it the “spare tire” for your financial journey.

You don’t think about it much. You hope you never have to use it. But you’re sure happy it’s there when you need it.

Setting aside some money, typically 3-6 months of living expenses in an easy-to-access account is universal advice from financial advisors. 

It could be because lifestyle creep and overspending make it tough to save for anything. But I think there’s a more subtle reason. We doubt that an emergency fund will make us any wealthier. We say things like:

• “Emergency savings don’t grow like the stock market, so they lose value due to inflation.”
• “I can just use a credit card or borrow money if something urgent comes up.”
• “Why set aside money for a mystery event that may or may not happen, when I have goals like retirement, funding college, or going on a trip that I am planning for?”

Thoughts like these kept me skating along the financial edge for a while. But after doing some digging, I’ve learned many ways this savings reserve provides awesome stability for a financial plan and can make you even wealthier.

Here are seven ways an emergency fund can be a wealth-magnifying machine.

7 Ways an Emergency Fund Can Make You Wealthier

1. Stay Out of Debt

Most people “think” they have an emergency fund, it’s in their wallet and has the word VISA emblazoned across it. But tapping a credit card in a crisis is just turning one kind of financial emergency into another.

Of course credit card companies want to be your emergency fund. When you spend to fix a leaky roof the folks at Visa do a happy dance. They know you won’t be able to pay it off in a month and are going to make a killing while you struggle to make monthly payments.

Credit card companies simply charge too much interest to make swiping in an emergency your best plan (20.75% APR as of this writing).1 A stash of emergency cash keeps compound interest working for you, not against you.

2. Save on Insurance

Insurance spreads the risk for the big-ticket items we can’t pay for out of pocket, like a medical procedure or major car repair.

But there are typically deductibles to pay before you can collect. The higher your deductible, the less risk the insurance company is taking, so they cut you a break on your premium and the less you’ll pay every year on insurance.

A beefy emergency fund lets you “self insure” for minor expenses by choosing plans with higher deductibles. Higher deductibles mean lower insurance premiums - potentially saving you hundreds on insurance costs per year.

3. Get a Better Job  

Why do experts recommend having an emergency fund covering 3 to 6 months of expenses? Because it provides a buffer against the shock of losing your job. If your income disappears, this stash lets you pay for life while patiently pursuing a great gig, not just the next gig.

But let’s turn this advice on its head. If you are unhappy in your job but are living paycheck to paycheck, what can you do? Nada. You’re latched to your employer and your terrible boss Mr. Lumbergh.

Having months of financial runway changes your whole mindset. Your emergency fund gives you options - like shopping around your resume, taking the job at a startup, or moving to a career with a lower salary but higher upside. Any of these options could help you towards a healthier, wealthier life.

4. Confidently Pursue Your Goals

Let’s be real. Setting aside a cash reserve isn’t very exciting. But it is the first step toward a series of greater life goals.

An emergency fund gives you a reserve for repairs when purchasing a fancy new home or new car. It allows you to invest in tax-advantaged retirement or education accounts (the ones you can’t withdraw from easily) knowing you won’t need to tap into that money to meet a short-term need.

Speaking of investing...

5. Protect Your Investments with a Low-Risk "Bucket" 

If the stock market drops, your emergency fund will just be chilling there, unfazed. While everyone else is frantically wishing they hadn’t invested all their savings in cryptocurrency, you’ll be sipping a margarita on your porch knowing you don’t need to make a move.

This low-risk portion in your financial plan keeps you at ease, letting the riskier portion of your portfolio continue doing what it’s done historically: fluctuate in the short term, and deliver better returns than a savings account in the long term.

6. Cultivate Wealth Building Habits

Building an emergency fund helps you nurture great financial habits. What habits you ask?

• Setting clear, attainable goals
• Saving money regularly
• Planning for the future
• Protecting against the downside

All of these habits will serve you, not just for this goal, but for every financial goal.

7. Clarify Cash Needs, Invest the Rest

Some people may already have enough set aside for emergencies, but it’s all over the place. A bit in your Venmo account, some funds in savings bonds, uninvested cash in a brokerage account, even a chunk of money being used as a “buffer” in a checking account.

Combining all of this into one emergency fund can clarify exactly how much cash you require. Knowing how much to have can reduce cash drag in your investment plan, enabling you to put the rest of your money to work investing towards other dreams.

Everything You Need to Build Your Emergency Fund

Ready to sleep better at night under a blanket of financial peace, knowing you’ve got a generous cash cushion to protect what matters?

Use the new BrightPlan Emergency Goal to determine exactly how much to set aside for your rainy day, and then:

• Start strong with an initial deposit you are comfortable with
• Regularly contribute as much (or as little) as you want
• Earn interest on your savings
• Track progress until your fund is topped off
• Quickly access funds when you need them

Notes: 1. Current Credit Card Interest Rates according to bankrate.com as of 04/3/2024