Financial experts have long advocated for the emergency fund: savings set aside to pay for life’s unexpected emergencies. This financial cushion can also help cover your daily living expenses should you lose your job. But is it possible to save too much money in an emergency fund?
Yes, if you could be using that extra money to invest, pay off high-interest debt, or boost your retirement savings.
Here are a few signs that your emergency fund is too big, and that the money in it — at least some of it — would be better used elsewhere.
1. You have more than enough emergency savings to live off
Financial experts have long recommended having three to six months’ worth of daily living expenses covered in an emergency fund. However, this is a general guideline, and you should tailor the specific amount to your unique life circumstances.
If you’re a high earner with a specialized job, for example, you may need a larger emergency savings. If you suddenly lost your job, it may take you longer to find a new position in your field, and your loss of income may be significant. Single people should also consider saving more. With only one source of income coming in, there is much less wiggle room in the budget to withstand a job loss or other financial emergency.
Regardless of how much is in it, your emergency fund should have enough money so that you can pay your mortgage, car payment, phone bill, utilities, and any other daily expenses during a crisis without resorting to credit cards.
To calculate if your emergency fund is too big, you’ll first need a monthly budget that lists all of your expenses. Multiply that figure by six, or 12 if your situation calls for a larger emergency savings. If you have more than enough saved to live off for six months to a year, you can stop building the fund. Your additional dollars would better serve you elsewhere. (See also: Is Your Emergency Fund Costing You Money?)
2. You’re behind on your retirement savings
You might think having too much money in your emergency fund is far from a problem. But it could be if you are stowing money in an emergency fund at the expense of depositing it in a 401(k), IRA, or other retirement savings vehicle.
You’re supposed to save emergency fund dollars in a safe place. That usually means a savings account. The problem is, even the most generous savings accounts pay interest at just 1 percent, if not lower. The money you have in a savings account will grow much slower than it would invested in an IRA or mutual fund.
Those extra thousands of dollars sitting in your emergency fund could instead be helping to build your nest egg. If you’re behind on retirement savings, it might be time to take a closer look at your emergency fund. If you have more than the recommended amount of savings in it, start moving some of that money into retirement savings. (See also: 7 Retirement Planning Steps Late Starters Must Make)
3. You’re struggling with credit card debt
High-interest credit card debt is the worst kind of debt to have. It’s not unusual for cards to come with interest rates of 17 percent or higher.
If you carry a balance on your cards each month, and if you’re only able to make minimum monthly payments, check in with your emergency fund. Any extra dollars in that fund beyond the recommended amount could instead be used to pay down your credit card debt faster. (See also: The Fastest Method to Eliminate Credit Card Debt)
4. You’re a two-income household
Do both you and your spouse or live-in partner work full-time? You might not need as large of an emergency fund. If you lose your job, your household will still receive an injection of cash from your partner’s salary.
If you do have that extra salary, you might consider an emergency fund that has fewer months’ worth of daily living expenses. Your partner’s salary can act as a cushion while you use the dollars that you would have placed in your emergency fund to instead pay down credit card debt, boost your retirement savings, or invest. (See also: 5-Minute Finance: Start an Emergency Fund)