Why High-Income Earners Should Maintain an Emergency Fund
Having a Cash Reserve on Hand as Backup Provides More Than Just Peace of Mind| By: Randall E. White, CFP®, RICP®, CRPC®, CMFC®
There seems to be a split in the financial planning industry surrounding whether or not high-income earners should have an emergency fund or not. Some experts remain committed to the prevailing wisdom that it’s smart to have at least three months’ salary set aside, should something unexpected happen. Others, however, argue that having an emergency fund doesn’t necessarily serve high-income earners.
While it’s true that everyone has their own unique financial situation and needs, I believe it’s still important that everyone have a financial safety net in place regardless of how much income they’re earning or how much they have in assets. In the article below, we’ll look at both sides of the issue.
The Argument: An emergency fund isn’t necessary if you have a steady paycheck and a credit card.
This argument relies on the logic that, should any unexpected expenses come up, you can charge them to your credit card and then pay the balance down with your next paycheck before interest accrues. While this argument seems valid at face value, there are a few problems with it.
To begin with, say you need emergency cash because you unexpectedly lost your job – you’ll no longer have those steady paychecks to depend on and you’ll end up with high credit card debt. Also, some situations may cause a few things to go wrong simultaneously. For example, if you find yourself injured or disabled, you’ll not only be out of work with a change in your paycheck, but you’ll also have unexpected medical bills to pay. Situations such as these show that having an emergency fund to lean on can help provide you with more financial stability and peace of mind no matter what comes your way.
No matter where you are in your career or how much money you’re making, having a cash reserve to depend on serves three crucial purposes on top of giving you peace of mind:
#1. An emergency fund saves you money in the long run.
The practicality of an emergency fund is fairly easy to understand – should you find yourself facing an unexpected event or expense, having a sum stashed away saves you from taking on more debt through credit cards or loans. Having cash on hand that’s specifically earmarked for unexpected expenses also saves you from potentially having to liquidate assets or sell investments at a loss. Ultimately, an emergency fund saves you money in the long run by allowing you to avoid debt and interest, as well as ensuring you can still buy low and sell high at your discretion.
#2. An emergency fund helps you strengthen your money habits.
It can be difficult to remain disciplined about saving money, especially if you’re a high-income earner with large paychecks coming in consistently. Setting the goal to put three to six months of expenses into a savings account – and then remaining dedicated to following through – can help you solidify positive financial habits while simultaneously growing your net worth. It also provides your finances with more structure as you work toward your savings goal, which can be helpful as you tackle goals in other financial aspects of your life.
#3. An emergency fund provides you with a firm financial foundation.
When you establish a cash reserve for emergencies, you’re cementing your financial foundation in ways that provide you the freedom to take on more risk in other areas of your financial life. For example, having a cash cushion allows you the opportunity to find a new position or start a business if you’re unhappy with your current job situation. Or should you be laid off, you’ll have time to find a job that works for you rather than having to feel the pressure of accepting the first position you’re offered.
An emergency fund also provides you the ability to save on insurance premiums because you can raise your deductibles. What’s more, if you find yourself in an unstable economy or are experiencing market volatility, an emergency fund can provide you with some peace of mind knowing that you have a few months’ worth of expenses tucked away just in case you need it.
Where to Keep Your Emergency Fund
The main thing to remember when deciding where to hold your emergency fund is that you want it somewhere that’s easily accessible yet separate from your other savings. It’s best not to attach the account to your debit card so you won’t be tempted to dip into it for non-emergency expenses. Utilizing a high-yield savings account ensures you’re keeping your emergency dollars liquid, while also making the most of potential interest.
Final Thoughts on High-Income Earners and Emergency Funds
It may be time to reconsider your mindset if you’ve been thinking that your high-income status exempts you from needing an emergency cash reserve. Even as a high-income earner, an emergency fund can provide you with stronger financial security than your paychecks can on their own. At the end of the day, none of us can fully predict what our future holds and having accessible money to fall back on in the face of the unexpected can do wonders for your mindset – as well as your financial stability over time.
At TriCapital Wealth Management, we begin the financial planning journey with your long-term goals in mind. Our team of advisors remains committed to building a wealth management plan alongside you as a collaborative effort. If you’d like to talk with one of our advisors about how you can best allocate your savings, investments, and cash reserves to optimize your wealth and minimize your tax liability, please contact us today.
Securities offered through Triad Advisors, LLC, member FINRA/SPIC. Advisory services offered through TriCapital Wealth Management, Inc. TriCapital Wealth Management, Inc. is not affiliated with Triad Advisors, LLC.