Life is all about the unexpected, and our finances are certainly not immune. Unforeseeable expenses like medical bills, auto repairs, and fixing up a home can take a devastating bite out of our budgets.
One answer to this problem is to have a stash of emergency cash set aside to help shield us from the negative effects of these unanticipated events. But is an emergency fund always the way to go?
The Arguments for Having an Emergency Fund
Having money set aside for emergency situations seems like a sensible idea because:
You don’t have to depend on credit cards (and insane interest rates!)
Credit cards are not the ideal solution for responding to an emergency. With interest rates easily being higher than 20 percent for many cards, individuals who choose credit cards over emergency savings can find themselves downing in debt within a short period of time.
Less stress about abrupt lifestyle changes
Maybe you’ll find yourself unexpectedly unemployed or facing a serious health crisis. Having that emergency fund readily available to you will make these already stressful situations significantly less worrisome as you know you have the funds to pay your bills.
The Arguments Against Having an Emergency Fund
As nice as having an emergency fund may sound, there are some pitfalls as well, including:
Many of us simply don’t have enough for emergency savings
Several individuals are already cash strapped and don’t have a penny to spare. Without taking on a second or third job, you may not have enough money to set any aside without having to make unnecessary sacrifices in the meantime.
Saving for emergencies can get in the way of other financial goals
Savings are great, but they can also get in the way of achieving other financial goals like paying down existing debt or saving for a holiday.
You’re actually losing money
A lot of people stash their emergency fund in a savings account which only gives pennies of interest each month. Given the rate of inflation, they are actually losing money instead of making money.
Having It Both Ways
What if there were a way to get the both of best worlds?
Rather than set your emergency fund aside in a savings account, make it work for you. One way to do this is through P2P lending.
Also known as “social lending,” this form of investing routinely delivers returns to lenders which are several percentage points above a bank CD. You know who you’re lending money to, where the money is going, and you become a part of a thriving investment community.
To learn more about current P2P lending options out there, we invite you to contact us.