Emergency Savings Are a Key Part of Getting Rich

If long-term investing is such a simple way to build wealth, then why isn’t everyone rich?

U.S. financial advisors have a habit of shoving charts and statistics in people’s faces to show how earning the average rate of return of the US stock market over long periods of time can build life fulfilling wealth.

But the question remains: if it’s so simple, why hasn’t everyone done it?

One common yet surprising reason is a lack of emergency savings.

“I thought emergency savings were the super boring part of personal finance, not a key part of getting rich?”

I believe, on the surface that’s true. Most financial advisors recommend keeping 3-6 months of fixed living expenses in easily accessible cash to pay for emergencies as they arise.

Now besides the fact that having adequate emergency savings can significantly reduce your stress levels as you go about life, they have a more exciting purpose.

One of the most common mistakes I see, to building wealth with long-term investing is having to take your money out of the market out of necessity.

Someone may fully understand the benefits of remaining invested over long periods of time, but if their kid breaks a bone and they don’t have the cash to pay for it, they may be forced to sell their long-term investments early. This interrupts the compounding process and being a forced seller is never a good thing as you’ll have to take whatever price the market is currently offering, no matter how good or bad.

That’s why having adequate emergency savings is so important.

Not only does it allow you to walk around with a little less stress knowing your family will be okay if an emergency rears its ugly head. But it’s also what provides you with the cushion to leave your long-term investments alone as you deal with whatever emergency needs your immediate attention.