Emergency Fund: Where to put the money and how much?

Emergency Picture
One of the lessons the pandemic has taught us is the need to have cash set aside

Emergency Fund:

The volatility in the stock market, job layoffs and furloughs, unexpected expenses. This year has led to a lot of uncertainty for many Americans.  This has also shown us the need to have some cash set aside in case we have future emergencies. An emergency fund is a readily available liquid source of assets that can be used during times of financial distress.  Liquidity refers to how quickly you can convert those assets to cash that can be easily used for those unexpected expenses. Having money set aside to handle life’s curveballs are essential for your finances and to keep you out of missteps that could have long term ramifications.  The times when an emergency fund are found useful are: loss of a job, home or auto repair, medical emergency or an unexpected worldwide pandemic such as the Coronavirus(sounds crazy).

Where can you put the money?

The most common place to put your money for use in case of an emergency is a checking or savings account. You want to make sure that whatever account you are using is separate from your everyday operating account. Also, this account should have a layer of difficulty that makes it not easily accessible.  Remember, a new pair of shoes or a flat screen tv that is on sale is not an emergency.

There is now a plethora of online banks that offer compelling benefits for placing the money with them. Traditionally, these banks are not as well-known and tend to pay a higher interest rate to earn your business. These accounts are known as high yielding, however, with the interest rate environment the way it is today these banks have had to cut their interest rates which have made them less appealing. The second item to look for when selecting a bank to hold your emergency fund is the impact of any fees. Most banks will charge a monthly fee if your balance is below a certain amount or if you do not have direct deposit setup on your account.  Be aware and make sure to select a bank that will not nickel and dime your emergency savings. Nerdwallet put together a list of good places to look that may have higher than average interest rates, the list can be found here.

Make sure that the money in your emergency fund is not invested.  This money needs to be easily accessible and available to be withdrawn the same day you need it.  Stocks, mutual funds and ETF’s should be avoided because of their appetite for risk and fluctuations that occur due to the market.  Also, CD’s are one of the last places you would want to place emergency fund assets because of the fee for early maturity.  Make sure that your money is in cash or a money market when you are building and sustaining your emergency fund.  Let me know if you would like some information on cash equivalents and the rates they are currently paying.

How much should someone have saved?

This question is different for everyone and there is no one size fits all solution. The typical rule of thumb that you may hear from Dave Ramsey is 3-6 months living expenses saved in cash. Dave also suggests that if you have bad debt, such as credit cards, that you have a beginner emergency fund will $1,000 saved. Most people have a “sleep well at night” amount that they like to see if cash and for the most part that could be used to cover an emergency.  Here are some factors to consider when deterining what about you need to have set aside in an emergency fund. Are you a one income or two income household, obviously a 1 income household will need to have more saved in the case of an emergency.  How quickly can you find a job? This is something that few can truly answer but there is an easy way to gauge this.  Ask people in your network or look around on LinkedIn to see if you are marketable and if finding another job would take little time.  One strategy you could use is however many months it will take to find a job, that is the corresponding amount you would need to have monthly expenses saved in an account.  Medical history, age of household appliances and state of your current automobile are all things to consider when determining how much to have saved in an emergency fund.  When dealing with an emergency your spending should only be on essential items.  Therefore, take time to examine your budget and see what expenses you can get rid of in times of a crisis.

Here are 4 quick ways to earn some cash to start building up an emergency fund.

For retirees and preretirees an emergency fund is different than the money you will have set aside for living expenses.  Although the money you have set aside will be in conservative investments or cash this is not to be used as emergency funds.  The money in your portfolio that you are conservatively investing is designed to cover ordinary living expenses, with that in mind you will still need to keep cash set aside in case of an emergency that can bring on unexpected bills.


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