Why Should Building Liquidity
Take Priority Over Investing?

"Every time we almost reach our contingency fund goal of having $10,000 set aside for future needs, a reason to spend some of it comes along (car dies, hospital bill). Do we have to postpone moving into the stock market until we replenish what was spent, or can we apply our monthly surplus to Level Two and Level Three at the same time?"

This question from one of our readers gives voice to the frustration that many savers feel. After building their contingency fund (often from scratch over a period of a few years), they're exhilarated. "At last," they think, "we're debt-free, and have a large contingency fund to serve as a financial safety net. We're finally ready to begin making real progress on our long-term retirement portfolio."

Then, boom! An unexpected expense knocks down the balance in their contingency fund. Now they have to return to the drudgery of building it back up again. It seems they'll never get beyond this stage. Is all this caution about having a contingency fund really necessary?

My primary goal is to encourage you to take reasonable and informed steps, which I believe will provide you with emotional comfort in the present and financial security in the future. Although I can make recommendations, you have to live with the consequences. Ultimately, you must do what you believe is best and take responsibility for the results. If you want to increase the amount you invest in stocks while still building (or replenishing) your contingency fund, that's a decision you're free to make. It's not as sound a strategy because you lack the safety net that is desirable. For example, what if the investments don't pan out, and more unexpected events arise (such as a job loss or hurricane damage) to further deplete your contingency fund? On the other hand, everything could go well and you might even be better off financially a few years down the road.

There is no way of knowing ahead of time which would end up being the more profitable course. But it is obvious which approach is the more prudent—rebuilding the contingency reserve first. The general rule, then, is when you withdraw funds from your contingency account, you should make every effort to rebuild it as quickly as possible.

Laying this foundation is vitally important and, if you'll commit yourself, it can be done. So, be diligent and be prayerful.

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