How big is your emergency fund and when should you spend it? Growing up, I learned all kinds of money lessons from my mother. An avid saver, she socked away every cent that she possibly could. She cut coupons, shopped at garage sales, and drove cars without heat or air conditioning. She even paid for our family piano with money she got from refunding (people often earned extra money sending in for small rebates in the ’80s), and paid off my childhood home in 17 years instead of 30 just by making extra payments religiously, every single month.rsz_gettyimages-480718522_2

Without knowing any different, I grew up in a home that was the epitome of frugality and responsible spending. Fortunately, something about those lessons stuck with me once I became an adult and embarked on a financial journey of my own. And, even though I was keeping up with the Joneses during a good part of my 20s, I’m now back where I started –– refusing to turn the air conditioning on, wearing old clothes, and eating leftovers. And I have to admit, I actually like the frugal lifestyle that my parents had. It keeps our lives simple.

But, even though my parents taught us a lot about saving money, they never talked much about investing. And even if they did, I probably wouldn’t have listened. I mean, throughout most of my childhood, I was barely capable of understanding how food got on the table and a roof over my head. And I definitely wouldn’t have listened once I was a teenager. Why? Because I knew everything. Regardless, it’s one thing to teach children how to save on everyday items, but something entirely different to teach them the ins and outs of the stock market, where to invest and when. So my parents mostly skipped over the lessons on how to invest and make money grow, and focused heavily on how I could hold on to my money in the first place.

The opportunity cost of an emergency fund

Thankfully, we heeded advice from trusted friends and started contributing to our work-sponsored retirement plans and some basic index funds fairly early on. We’ve also invested in real estate by buying a few rental homes in the town I grew up in. But other than that, it has been difficult to know where to invest any extra money we’ve come across, mainly because of all of the conflicting advice out there. It’s hard to know whom to trust.

But one thing I have almost always been able to do was to save, whether it was in a tin can in my room growing up or in an online savings account as an adult. Something about saving money has always made me feel secure. It makes me feel in control. And while saving certainly isn’t a problem in itself, I know for a fact that we have missed out on opportunities by holding on to funds that should have been invested long ago. One example: Even though we only planned to set aside three to six months of expenses for emergencies, we let our emergency fund grow big enough to cover two years of expenses at one point, simply out of laziness. And truthfully, it never really bothered me.

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That was, of course, until this happened:

“Wow, babe. Can you believe that our kids’ college funds made 23 percent this year?” my husband asked.

My heart sank.

“And our retirement funds went gangbusters too. Winning!”

I didn’t feel like I was winning.

Truthfully, I became instantly angry at myself for letting our savings sit idle for so long. Everybody talks about the extraordinary power of compound interest, but there’s a flip side to that — the side where your savings actually loses value due to inflation and other factors.

I no longer wanted to be on that side.

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Setting boundaries

So my husband and I talked and talked. When it came down to it, I had to admit that I liked having that much money readily available, mainly because it feels like we have so many liabilities. And we do. Having three houses means that we have got three furnaces, three air conditioners, and three roofs, after all. We’ve also got two kids and a high-deductible health insurance plan.

“But we also have a high savings rate,” my husband noted, which is true. “If any of those emergencies came up, or even a few of them came up at once, we could just stop saving for a few months and take care of those expenses.”

He had a point.

After that conversation, my husband and I put our heads together to decide what a reasonable emergency fund should look like. To see if we were on the right track, we looked to the experts starting with J.D. Roth:

“As usual, I recommend that you do what works for you. There is no one right answer. Examine your situation — your income and your needs — to decide how much you should save. (My wife and I have a $5,000 emergency fund, which would pay the mortgage for three months, or all expenses for two months. This seems right for us.)” – J.D. Roth

Then we also looked at Dave Ramsey’s and Suze Orman’s advice:

“A fully funded emergency fund is 3-6 months of your personal expenses set aside in a savings or money market account.” -Dave Ramsey

“Keep saving until you have at least 8 months to one year of an emergency fund.” -Suze Orman

Yep, you read that right. Professional advice on the topic is all over the place, and there are some experts that say you don’t even need an emergency fund at all. But the thing is, we knew ourselves and our own situation enough to know that we need an emergency fund — not only so we could sleep at night, but also so we could handle the ups and downs that life throws our way. And the truth is, there have been times in our lives when our penchant for saving has been a huge blessing, not a curse. Our emergency fund has paid for countless emergencies, repairs, and unexpected situations, and has helped us get through hard times without causing us to sacrifice or go into debt. We knew we didn’t want to give that up, so we didn’t.

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Ultimately, we decided that our initial instincts to keep three to six months of expenses in cash savings were right, for us at least, and we devised a plan to spend our e-fund down to a reasonable level.

Here’s what we did:

  • We set an emergency fund ceiling. Since our bare-bones expenses are around $3,000 per month, we decided that our emergency fund shouldn’t exceed $15,000, or five months of expenses. Although this is more than some experts recommend, we decided to keep slightly more cash on hand due to our specific situation.
  • I fully-funded my Roth IRA for the year. We decided another good use of excess funds was to go ahead and max out our Roth IRAs for the year by contributing $5,500.
  • We took care of deferred maintenance. One of our rental properties has a slight water problem in the crawl space, which we have put off repairing for years. So, during our spend-down, we paid for the installation of a drain system underneath the home … and it wasn’t cheap! (But it works.)
  • We fixed up our new home. At the beginning of November, we finally found the perfect place to call home. Unfortunately, it was a little rough around the edges with old stained carpet, dingy paint, and fairly immediate need for some upgrades. Once we moved in, we used some of our excess funds to replace the carpet, paint the inside of the home, and buy new counter tops and a dishwasher. In a way, we just considered this expense to be part of our down payment on the home.

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Now that we have spent down our emergency fund, I feel like we’re on the right track. And from now on, we are going to be more diligent about investing our savings regularly so that the same thing doesn’t happen again. Because, as we all know, saving money is only part of the equation. It’s the magic of compound interest combined with investing that helps us get rich. There are so many things that we want out of life, but only a limited time on this Earth to accomplish them. We want to pay for our kids’ college. We want to retire early. We want to see the world. All of those things can happen for us, but making our money work for us will make them happen that much sooner.

Have you ever failed to invest out of laziness or fear? How big is your emergency fund?