Your Emergency Fund: How Much is Enough?

Your Emergency Fund: How Much is Enough?

May 26, 2021
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Everyone has heard of the term “emergency fund” but what does it really mean? To most, it means having the money required to pay for emergencies if they were to appear. For example, the water heater stops heating, the dishwasher starts leaking or a family member becomes a regular at the local hospital.

Unexpected expenses are bound to come up in your life and it’s important to have the resources required to deal with them. Our advisors can help you put together a plan on how to get your emergency fund started or what to invest your current emergency fund in to help it grow. Make sure you’re better prepared for a financial emergency by following these steps below!

How Much Money? How large should an emergency fund be? There isn’t one single answer that fits every individual. Instead, we like to walk through this step by step with each client that we meet with. Some of the major factors that could determine your “emergency fund” amount would be number of dependents, if you own a house or other property, or if you have underlying health conditions. Saving for emergencies can be even more important if a job loss would affect your income or if your income is more volatile because of the job you have.

Coming Up with Cash No one particularly likes to save multiple months of income. However, by doing it in smaller increments it can make it seem much more possible. Most clients find it much more reasonable to first start trying to save $1,000. The easiest way to do this is by setting up monthly automatic transfers into the fund you’re using. Then mostly all you must do is continue to watch it accumulate and do your best not to spend the money on something non-emergency related (easier said than done).

Where Do I Put It?  Most people open a traditional savings account to hold their emergency fund in. The problem with that is that there is almost no rate of return on these accounts right now with interest rates being close to all time lows. A certificate of deposit (CD) may potentially offer slightly higher returns (still very small currently), but the problem then becomes a matter of liquidity. CDs have maturity dates, they can vary from short to long term, but the important thing to remember is that you can’t get that money until the maturity date unless you want to pay the bank some fees.

Other options include money market accounts or money market funds. Money market accounts are very similar to a traditional savings account, but money market funds are considered low-risk securities. However, money market funds are not backed by the government like most savings accounts and CDs. This means that there is a risk of losing money involved that wouldn’t be the case in a traditional savings account.

Most people can find it helpful to meet with their advisor and find a nice combination of low-risk investments to hold their “emergency fund” in. This can offer better returns while still maintaining the low risk required for the money to be there in case of emergency. Take us up on our free, no obligation portfolio reviews today and see how you can prepare for the unexpected. If you don’t have an emergency fund started, we’d be more than happy to work with you and get your savings started today!

 

This is meant for educational purposes only.  It should not be considered investment advice, nor does it constitute a recommendation to take a particular course of action. Please consult with a financial professional regarding your personal situation prior to making any financial related decisions.  (05/21)