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Why Saving Money for an Emergency Fund Could Prove Financial Disaster

Finance By
The mistake of saving for a rainy day. (Getty Images)
The mistake of saving for a rainy day. (Getty Images)

 

Most of us have been trained to believe saving money could be a life saver.

After all, what if we lose our job? What if we have an unexpected health crisis? What if one’s home burns down? As a result, we try to set aside funds that can be quickly accessed for a rainy day or some sort of emergency.

Turns out this approach to saving may be less shrewd than shortsighted. In a recent article for Investopedia, Control Your Cash website founder Greg McFarlane notes all the better things we could be doing with our money instead. For starters, there’s the matter of debt. The math of saving when you have an outstanding tab simply doesn’t add up: “Instead of amassing an account that pays you 0%, or a few basis points above that, maybe you should focus on closing out an account or two that’s costing you 15%,” he writes.

For those fortunate enough to be in the black, it still doesn’t make a great deal of sense to take the conventional approach to emergency saving. As McFarlane writes:

“Because an emergency fund is supposed to be easily accessible and liquid, the recommended vehicle for it is usually a savings account. Savings accounts don’t even keep pace with inflation, meaning that an emergency fund is a money-losing proposition over the long term.”

So what should you do? McFarlane advocates putting money to work for you now. This includes seeking more profitable approaches to investing than relying on a savings account and being willing to spend money to make money. (He notes that buying a plane ticket to interview for a potentially lucrative job is a smart investment.)

Ideally this way, should the unthinkable occur, you’ll be in a stronger position to handle it. To read more about improving your financial situation today in case of misfortune tomorrow, click here.