“Save for a rainy day” is an old piece of advice — and a good one. But is it possible to save too much?
To begin with, what defines a “rainy day” in terms of financial needs? It could be any number of things: a temporary loss of employment, a major home or car repair, a large medical bill, and so on.
If you did not have the money readily available to pay for these types of expenses, you might be forced to dip into your IRA, 401(k) or other retirement accounts, incurring taxes and possible penalties, as well as lowering the amount of money you’d have available for retirement. And that’s why it’s a good idea to build an emergency fund containing up to six months’ worth of total expenses, with the money kept in a liquid, low-risk account that’s separate from the accounts you use for your daily spending needs.
