Can You Save Too Much for Emergencies?

The question sounds a little silly. I mean, can you ever really be too prepared for something? I believe you can, when the resources you’ve allocated to preparedness mean you can’t afford to do something else with your money.

Take emergency funds as an example. While I advocate most people save one year of basic living expenses in a liquid emergency fund, many others advocate living on much less. The old standard 3-6 months is still often touted as the way to go.

In this economy, with the average length of economy ranging from several months to a year, it just seems prudent to put away a year’s worth of household expenses – to keep the lights on, a roof over your head, gas in the tank and food on the table. In my opinion, anything less puts your family at risk of financial hardship should you lose your primary source of income.

Some people don’t get that message, and instead squander every penny the have that could go towards savings on something they want now. I get that. For a long, long time we operated our household at the edge of a very steep cliff, with no emergency fund, and we are lucky nothing serious like an illness or a job layoff came along and wiped us out (it wouldn’t have taken much).

The Extreme Saver

There are others who go too far in the other direction – allocating every single dime in their portfolio to cash savings. These folks often have several years worth of mortgage payments and expenses saved in cash.

That’s fine if it helps you sleep at night. However, consider the opportunity cost of simply parking that money in a cash-based investment vehicle earning less than inflation (which unfortunately is still the case even at the best online banks). Over time, inflation, and the further cheapening of the U.S. dollar, will conspire to erode your savings.

With our one-year emergency fund I largely ignore interest rates, because I don’t have money set aside to work for me. Rather, I have it set aside to be there if it hits the fan.

Rather than keeping three or four years of savings in cash, consider dropping down to a year, or two, as a compromise. The remainder can be invested in a variety of vehicles depending on your appetite for risk.

Five Places for Your Surplus Emergency Fund

Keep in mind, I’m only suggesting the following locations as options for money you’ve saved beyond your one-year emergency fund. I do not recommend these savings vehicles serve as your primary emergency fund because they are often exposed to more risk, and/or fees for withdrawal, etc.

Dividend stocks. Investing in dividend stocks with a 25-plus year track record of increasing dividends may be a good spot to park a portion of this money. By reinvesting those dividends of the long-term you can take advantage of compounding to grow significant wealth.

Roth IRA. If you are not contributing to a Roth IRA, use the first $5,000 to open one. And remember, Roth IRA contributions can be withdrawn at any time, so you may consider them an extension of your emergency fund, but with some additional risk exposure if invested in equities.

Real estate. If you have ever been interested in investing in real estate, now might be a good time to put some of that surplus to use. Rates are near an all-time low, and housing prices have not yet rebounded in many markets.

Gold and/or silver. I’m not one to push gold and silver often, but the case could be made for putting 10% or so of your savings into one or both of these investments. Personally, I like silver because it is still cheap enough for me to buy the real thing, rather than a certificate or exchange-traded fund that tracks the price of silver.

CD laddersCreating a CD ladder is a smart way to boost the earnings on your cash savings without locking it all away under the threat of penalty for early withdrawal.

The bottom line is this, it is smart to save for emergencies, but do not allow an irrational fear drive you to only save for emergencies. There are other savings objectives that must be met to have a healthy portfolio such as college savings, retirement, rainy day funds (and sunny day funds, too!).


  1. Great article. .. although, for me, at lowly baby step 2, I’ve got about two years before beefing up my E-fund to year-long levels. I currently have a credit card balance, a car loan, and student loans to squash. I feel comfortable enough having a 3k E-fund until my debt is gone. Its just me in my household and I rent, so I am ok with that amount until my snowballing days are over.

    Thanks for your inspiration blog FD! Helps me keep motivated 🙂

  2. Once you have enough assets that you can tap then I agree, you need not keep an amount in cash or near-cash. Also, the more revenue generating assets you have, the less reliant you are on the emergency fund … assuming that your expenses don’t consume everything.

    The other thing you can do is use loans. If you have assets then they often come with associated loans, so you have available debt capital there in case of emergency.

  3. Jason, all these suggestion has their limitation, when your horizon is only one year you really shouldn’t look out for a stock, a stock with 5% yield can actually drop in value to offset dividend growth and make your money actually shrink.

    Gold and Silver, though on paper looks very promising on a year’s horizon, but remember while selling precious metals you may never get the actual market price. If the gain in price in a year is not significant, you will lose money.

    Investing in real estate with surplus money… I guess you are talking about REIT. same volatility as shares exists in real estate market.

    I think with 1 year investment horizon I will go with CD ladder, bond fund and savings accounts.

    If you have play money to keep for one year, you can go in to those risky but rewarding instruments.

  4. Frugal Dad, I disagree on one point.

    5% at most should be invested in precious metals according to an efficient frontier curve of gold and stocks.

    If you want, an additional 5% can be invested in timber stocks. Timber is a good hedge against inflation and has a better track record than gold and silver.

    • Good point. I’m all about further diversification. I’ve watching Weyerhauser (WY) for some time, but since it’s conversion to a REIT it hasn’t done so well, save the run up after the Japan earthquake/tsunami. At least the yield is getting pretty attractive.

  5. There are lots of ways to look at this when you just consider the numbers. But for some people it is less about the extra $50 in interest they would earn, and more about the security of having money in a bank, that they can quickly access when needed. I’m not saying they are right numbers-wise, but unless you are talking about a large differential, the numbers won’t be that big a deal.

  6. The older I get, the larger I believe my emergency funds need to be. My debts are thankfully paid off. However, all my insurances have very high deductibles and health copay amounts are going up, not down. If Murphys Law hit at the same time my fund would be very hard hit and it would take a long time to replenish the fund. I sleep better at night knowing I have more, not less to cover emergencies

  7. You should sdo the following:

    (1) Get liquid financially.
    (2) Keep cash in a safe – several months worth. (Ever tried to withdraw a large amount of funds from a bank? Could take days. Also, your safe is probably safer than a bank these days);
    (3) Get out of stocks, mutual funds, and real estate over the next 12-18 months. We will get more money printing, but once that runs out, then a dollar devaluation will be severe along with inflation and higher interest rates (read the history of France in the 1700s. Printing money (especially at our rate) DOES NOT WORK);
    (4) Buy Gold/Silver – In normal times, 10% in these commodities/currencies would be reasonable. In these times, my opinion is start at 10% immediately and work into 20-%50% as things continue to deteriorate over the next 12-24 months. MONEY PRINTING JUST KICKS THE CAN DOWN THE ROAD!!!
    (5) Reduce debts and refinance them at low fixed rates ASAP;
    (6) Slash expenses.
    (7) Sell everything yu do not need now. Excess stuff.
    (8) Keep your job and/or get a job that will be in demand after we have our next collapse from the dollar and the government debt bubbles.

    Hold on for a bumpy ride.

  8. ok, after I thought I had accidentally double posted my comment the other day, turns out it didn’t post at all. try again:


    I think there’s a better strategy for cd’s than ladders, as described here:

    Basically, you find cd’s with a shorter penalty term for early withdrawal.
    While many cd’s over 1 year seem to have a 6 month penalty, and I’ve even seen 1-2 with a full 12 month penalty, there are some with only a 90 day penalty, and even a 60 day penalty like Ally Bank
    Their rates might be slightly lower than some others you can find, but that low of a penalty makes up for it. I am talking about their regular cd’s, too, not their no-penalty cd (which is only available for 11 months).

    So, keep it in multiple cd’s, in case you only need part of the money, but forget the ladder and buy all 5 year cd’s, all at the same time. It doesn’t take much rise in rates to more than make up for such a low early withdrawal penalty. Break those cd’s and turn around and get more with the new higher rates. Break the cd’s before even about 8-9 months is up, and after the penalty you’ll still have earned as much as a regular 1 year cd. Hold it for a full year, like you would be doing with a 1 year cd anyway, and after the penalty you’ll stil have earned as much as most 3 year cd’s.

    CD ladders might still be good sometimes, but that’s assuming 6 month penalties for early withdrawals, which really puts a damper on this strategy. 90 day penalties, you can still do this, but it would just take a little more caution and waiting an extra month to make up for the penalty. With only 60 day penalties, I think this is pretty simple, and definitely better than any ladder.

  9. The Roth IRA as an emergency fund idea seems to be gaining traction, and for good reason. By putting some of your emergency funds into a Roth, you have the same money serving two purposes–which is the preverbal “more bang for the buck”.

    The money sits in the Roth, growing tax free for retirement, but available (the contributions) if needed for an emergency. Hopefully the non-Roth portion of emergency funds continues to grow so a withdrawal will never be necessary.

    • The only problem is that the “emergency fund” portion of the Roth IRA must be conservatively invested.

      Heaven help you if the Roth is 100% invested in stocks, the stock market crashes 50%, and you lose your job requiring to draw down the (now diminished) Roth IRA “emergency fund”.

  10. I save all the time. I try to save as much as I can every month. I put whatever I save into an investment fund and I look for opportunities to make extra money online as well. I work on GPT sites like Coolercash and Treasure trooper. I like these sites because they can get me a little extra money and it adds up for real.