The Emergency Fund Mistake You're Probably Making - DM 105

I have too much money in my emergency fund? Hey, it's Jon from Financial MD, welcome to today's Didactic Minute.

Well, I don't have too much in my emergency fund, but that is a thing. You can have too much in your emergency fund, and we see it with young attending physicians all the time. They go into practice for a couple of years. They try to do their own financial planning, which is basically no financial planning. And so, what ends up happening is they accumulate money in their emergency fund.

Well, not even really an emergency fund. They accumulate it in a checking account because they get paid. They pay their bills. There's money left over. And they keep doing that every two weeks, week after week, month after month, year after year. And then they finally sit down with us and we ask them some of the basic budgeting, cash flow questions, and emergency fund. Of course, we start with figuring out how much should be in their emergency fund, and then we see it's 100,000, 200,000, or more in their checking account.

Now, what's the problem with that? Basically, it's called lost opportunity. That money is getting 2, 3, maybe 4 or 5 percent, if they're putting it in a high-yield savings account. Right now, you can probably still find 4 percent in the high-yield savings. That's great. And you should have your emergency fund there. But pop quiz for all of you listening, if you've made it this far, how much should be in your emergency fund?

Post it down in the comments, and if you get it right, I'll give you the thumbs up. But having an emergency fund is important, knowing how much it is, but having too much is a problem because that extra money that sits in cash getting, you know, a decent interest rate is not really contributing to your future financial goals. It's not getting the 8 to 12 percent that it should be every year because it's sitting in investments, sitting in index funds, ETFs, whatever that you should be in.

So please check yourself how much should be in your emergency fund. And if it's not, figure out what you need to do with it. Put in a brokerage account, get some funds, max out your 401(k), Roth IRA, whatever the case might be.

Again, this is Jon from Financial MD. We'll see you next time.

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