Emergency Fund

When unexpected events cause us financial hardship, a well-funded emergency can provide the protection needed to deal with the issues at hand, but how much is enough?

What is it?

An emergency fund is a pool of cash set aside specifically to cover unexpected expenses that may arise in your life that your insurance doesn’t cover. Its primary purpose is to provide financial security and peace of mind in case of emergencies or unforeseen circumstances, such as medical expenses, job loss, or unexpected home repairs.

Knowing that you have a dedicated fund to fall back on allows you to face life’s uncertainties with greater confidence and resilience, enabling you to navigate challenges without resorting to high-interest loans or sinking into debt. This financial cushion fosters a sense of security and stability, enhancing your overall well-being and preserving your family’s financial health. It transforms unexpected setbacks from potential catastrophes into manageable hurdles, offering the freedom to focus on solutions and recovery rather than financial worries.

How much do I need?

We recommend having cash to cover four months of expenses set aside in an emergency fund if your monthly salary is consistent month to month. However, if your salary is inconsistent, then we recommend setting cash aside to cover approximately six months of expenses to compensate for the fluctuation.

It is difficult to set a one-size-fits-all answer for everyone, but four months of income is our recommendation because, on average, 70% of workers that are laid off can find a job within the first three months of being unemployed. Therefore, the emergency fund serves as a safety net to cover living expenses while searching for a new job, while also accounting for the month it takes to get the first paycheck if you were to start at the end of the third month.

If you were to get too ill to work instead, long-term disability income takes around three months to begin paying out. The first four months of having no income during this period would be covered by the emergency fund. Also, having a fund of this size would cover any of the high deductibles that are customary to high deductible health plans, ensuring that you have access to the care needed to treat the illness.

It’s important that you don’t excessively overfund your emergency fund because the extra cash could be better used toward other parts of your financial plan such as investing for retirement.

Budget cash aside every month to fill the fund. Make funding your emergency fund a financial priority, allocating a portion of your monthly budget to it consistently. Automating your savings by setting up automatic transfers to a dedicated savings account can help ensure you meet your savings goal over time. Once the account is funded to its goal and an emergency does arise, ensure that it is an emergency that isn’t already covered by any of your insurance, if it’s not, then use the cash. Once used, simply repeat the building process all over again to get it back to your goals.

Where should I put it?

The emergency fund should have one month of expenses sitting in a checking account, and three months of expenses sitting in a high yield savings account. It’s important that we have the funds stay as a liquid asset so that it’s quickly converted for use when needed. Because cash in  checking accounts is so easily accessible, we keep one month of expenses in the account so that its ready to be spent.

We keep the other three months in a high yield savings account because of the high interest that it will pay on the money in the account. The interest paid fluctuates every ten days based on market conditions but can be ten to twelve times the average savings account, which averages out to be between four to six percent over the last year. We don’t want to put all our emergency fund in this account because there are certain monthly withdrawal or transfer limits that could limit our access to the funds for everyday expenses.

If you are the individual with inconsistent monthly income, and budgets for six months of expenses, rather than four, the place the other two extra months into the high yield savings account as well.

When we begin to spend from our emergency fund, we first spend from our checking account. Once used up, we replenish the account with transfers of cash from the high yield savings account when needed.

Check with your employers to see if they have an incentive available for building your fund. Some large employers have been seen offering cash incentives, such as small bonuses or employer match, to encourage their employees to contribute to their own financial security.

Key Takeaways

Building and maintaining an emergency fund can provide you and your family the financial resources to deal with the unexpected crisis that may arise in our journey.

1. We recommend cash to cover four months of expenses total if you have consistent monthly income, or cash to cover six months of expenses is your monthly income is inconsistent.
2. Put one month of expenses in your checking account, and the other three in your high yield savings account.
3. Begin building the fund through budgeting for it monthly. Make funding this a priority in your budget.
4. Once filled, only spend for expenses that your insurance won’t cover. Refill through budgeting once more when spent.