Should You Build Your Emergency Fund or Invest Right Now?

January 23, 2023


Jordan has a question for us. He’s on step four of the Financial Order of Operations and has “fomo” on the market downturn that’s happening right now. Jordan writes, “I do not have a full three to six month emergency fund saved yet, but I will have a lump sum in December. Should I pause saving my emergency fund to max out my Roth right now?”

We know that step two of the Financial Order of Operations is getting all that free money from your employer because it’s got that matching money, which could be a 50% to 100% guaranteed rate of return. I always worry about this being a risk assessment thing. When you get to step four, that’s your emergency reserves, that’s three to six months. The market valuations are so they feel better now because there’s a lot of uncertainty in the air, but unemployment looks like it will increase.

An emergency fund is very important to have, as it’s your all-weather package to make sure you get through whatever life throws at you. I would encourage Jordan to not get so focused on the markets and instead focus on the basics and core things that he can do to maximize his finances and prevent risk that could derail his financial life. I would suggest that Jordan should max out his Roth in December when he gets his bonus and depending on how close he is to his emergency fund goal.

I would say not to pause saving his emergency fund in order to max out his Roth now, as it is more important to have a safety net in case of emergencies. Overall, remember to focus on the basics, max out Roth in December when he has a bonus and make sure to have a healthy income. Keep in mind that the market will recover and not to worry about timing the market too much.

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