Traditional financial planning recommends establishing and maintaining an emergency fund to meet unexpected expenses. But is an emergency fund really necessary, and more importantly, will it cause us to rely more on ourselves and less on God?
This post looks at what an emergency fund is, the role it should play in our lives and whether we should have one in retirement.
What Is An Emergency Fund?
According to a 2023 Bankrate survey, 57% of Americans could not pay for a $1,000 emergency out of savings. As the average cost of what is defined as an emergency has risen, this is clearly a problem for many people.
An emergency fund is money set aside in a separate account to meet unexpected expenses. Emergencies are defined as expenses that are not included in your budget. They could entail a significant unexpected repair that is needed for your car, to losing your job.
Financial advisors generally advise an emergency fund to be between 3-6 months of living expenses. For example, if your total monthly bills are $3,000 then:
- If you are single, or married and the sole breadwinner – set aside 6 months ($18,000)
- If you are married and both are working – set aside 3 months ($9,000)
If the transmission on the car goes and it will cost $3,500 to replace it, you can take the money out of your emergency fund and repay the money to your emergency fund over time. This allows you to avoid going into debt (via your credit card with very high interest) to pay for an emergency expense.
Many people think it is wasteful to keep that amount of money in cash for emergencies. However, there is much wisdom behind this. If you were laid off from your job and it took you four months to find a new one, would you be able to handle that financially? When the COVID lockdowns happened, people realized things beyond their control really do happen.
However, this leads to a very important question. If I have a fully funded emergency fund, am I relying on God to provide for my needs?
What Does The Bible Say?
The Bible does not specifically address emergency funds, but does indicate a few principles that apply:
- Debt Should Be Avoided
Proverbs 22:7 “The rich rules over the poor, and the borrower is the slave of the lender.”
The Bible equates debt to slavery. Avoiding debt as much as possible is wise.
- Planning Is Important
Proverbs 6:6-8 “Go to the ant, O sluggard; consider her ways, and be wise.Without having any chief, officer, or ruler,she prepares her bread in summer and gathers her food in harvest.”
We know we will have needs, some predictable, and others unpredictable. Planning for both is wise.
- Anticipate Needs
Proverbs 21:20 ”Precious treasure and oil are in a wise man’s dwelling, but a foolish man devours it.”
Randy Alcorn says ”The wise anticipate future needs while the foolish consume their resources, not considering the future.”
The story of Joseph in Genesis 41-47 best illustrates these principles in action. God revealed to Joseph that a famine would occur, so Joseph saved a portion of the harvest in the good years to provide for the years of famine to come. Through this, God saved Egypt (and the known world) from a famine.
As emergencies will happen and the future is unknowable, it is wise to prepare for them.
Balance Is Key
However, there is a balance that needs to be struck. In the US we often take “wise planning” to an extreme, trying to insulate ourselves from all the uncertainties of life (giving us a false sense of control). This drives us to put our faith in our own abilities rather than trusting God to provide for our needs.
Meanwhile, some Christians don’t prepare at all, as they believe God will provide for their needs. While God will provide, it presumes upon Him to bail us out of situations that could have been easily avoided by using wisdom.
Finding that balance is essential, and is different for each of us.
Where Should I Put My Emergency Fund?
Ideally, it is best to have a separate bank account designated as your emergency fund. This reduces the temptation to spend the funds on other non-emergency expenses.
As your emergency fund can end up containing a fair bit of money, trying to maximize the interest earned is beneficial. One of the best places are online savings accounts. This is an account offered by a bank that either doesn’t have physical branches or has a minimal number. All of your transactions take place online. Your online bank account links directly to your existing bank’s checking account, and allows you to transfer money within 2-3 business days between accounts.
There are a few key things you want to look for in an online savings account:
- It pays a competitive interest rate (normally much higher than your local bank)
- Is FDIC insured
- Has no fees or minimums
Some online banks enable you to purchase CD’s that could further boost your income (though you need to be careful as there may be a penalty to access your money before the end of the term).
If you don’t feel comfortable using an online account, you can find an alternative at your local bank. Generally, you won’t make as much in interest, but at least you would be better prepared for an emergency.
I’m In Debt, Should I Have An Emergency Fund?
Yes, even if you are in debt, you should work to establish an emergency fund. This may sound counterintuitive, as every dollar going towards debt makes a difference. However, if you don’t have any funds saved up to deal with an emergency, then you risk falling into even greater debt when an emergency arises.
One way to work on both goals is to determine how much you have left over after you pay all your bills (to include minimum payments on your debt). Then take half of the remaining amount to pay down the principal of your debt and put the other half into a separate account for your emergency fund.
Should I Have An Emergency Fund During Retirement?
When you retire, you transition from growing your assets to provide for your future retirement, to spending your assets to provide for your needs in retirement. This requires a fundamental shift in your thinking that can be very challenging.
Generally, when people retire, they will need to keep a larger amount of cash available than when they were working. It normally is the first time in their lives where the money coming in is less than the money going out. Having more cash on hand, helps you better deal with this new reality.
As people get closer to retirement, if they have most of their assets in the stock market, I encourage them to try and have 12 months of their living expenses set aside. This is not so much for emergencies, but to protect them from a market decline. Imagine during the first year of retirement, the market declined 40%. If you needed to pay for your living expenses out of your investments, that would be very painful (not to mention it could dramatically impact your finances during your later retirement years).
If you have 12 months of living expenses set aside, and the market declines by 40%, you don’t need to sell any investments to meet your needs. You can wait a year and hope the market recovers, preserving more of your assets for later in retirement.
Transitioning your emergency fund to a retirement income buffer as you retire, can help you stick with your investment plan in retirement when the market declines.
An emergency fund is an important part of our stewardship responsibility, and when used correctly, can be a valuable tool to prepare for the unexpected. If you can keep an appropriate balance, it enables you to avoid going into debt, and continue trusting God for His provision of your needs.