Here's Why I'm Not Planning to Increase My Emergency Fund in 2024

A lot of people I know are hard at work these days mapping out their financial goals for 2024. And I've certainly been putting some thought into the various things I'd like to accomplish in the new year.

In recent years, I've managed to max out my retirement plan, and I hope to do the same in 2024 -- both for the benefit of growing my nest egg and shielding some income from taxes. I also hope to invest more for my kids' college education. Although I've been putting money aside for my children's education since they were young, I'm not done saving for that milestone.

But one goal I don't have for 2024 is boosting my emergency fund. And there's a big reason why.

I already have enough cash

You might argue that there's no such thing as having too large an emergency fund. But I disagree.

You don't want to keep too much cash in a savings account because even though banks are paying generously these days, today's interest rates aren't the norm. If you keep too much money in a savings account earning 1% or 2% per year, which is more typical, you might lose out on the much higher returns you can get in a brokerage account or retirement plan.

The stock market's average annual return over the past 50 years has been 10%, whereas these days, I'm earning between 4% and 5% on my savings. That's certainly a great interest rate given that it's risk-free, but I don't expect today's rates to last for too long. And even if they do, 4% to 5% isn't 10%. Over time, I want that 10%.

I'm a firm believer in buying yourself protection against various financial scenarios, like unemployment and home and vehicle repairs. Without adequate cash reserves, you risk having to resort to expensive debt.

But here's the thing -- I already have enough money in my emergency savings to cover about a year of essential bills, plus a little extra to pay for home or car repairs. Usually, people are told to save enough in an emergency fund to cover three to six months of living expenses.

So the way I see it, I've done my part to sock funds away for the unknown. And I don't need to go beyond that, especially when I have a specific goal -- education -- that I'm trying to invest for.

How much emergency savings do you need?

The reason I even have that much money in emergency savings is that I'm self-employed. This means I could lose all of my work overnight without warning, and I wouldn't be entitled to any sort of severance pay. I also would not be entitled to any amount of unemployment. So I need to pad my savings to account for my specific circumstances.

However, if you work a salaried job, then you may not have to save nearly as much. You might, in that situation, be able to get away with three to six months' worth of bills in emergency savings. If you want to add a little extra to account for a potential home or car repair, that's great. But the typical person probably doesn't need 12 months' worth of bills in the bank.

That said, you might need that much money in the bank for your own peace of mind. If that's how you feel, go ahead and add to your emergency fund in the new year.

I, however, plan to focus my efforts on college savings -- because while I feel confident in my ability to handle an emergency expense, I don't yet feel confident in my ability to put three children through college. Not even close.