What is an emergency fund?
An emergency fund is a stash of money set aside to cover the financial surprises life throws your way. These unexpected events can be stressful and costly.
Here are some of the top emergencies people face:
- Job loss
- Medical or dental emergency
- Unexpected home repairs
- Car troubles
- Unplanned travel expenses
By setting up an emergency fund, you help protect you and your family from unexpected expenses.
So how much should you have in an emergency fund?
The general suggestion is to have 3-6 months of expenses set aside for emergencies. This will cover you in the case of job loss and allow you to look and find a new job, or at minimum find an alternative so you aren't out on the street.
To calculate how much you need, it's common to remove expenses you wouldn't incur in a true emergency. This would be general spending, eating out, vacation, and savings goals. It's your discretion exactly what you do, but these are general guidelines.
So, in what situations would you need more or less of an emergency fund?
You need more if:
- During a recession (when unemployment rates are higher and the length of unemployment is often longer).
- If you're in a high-risk industry where layoffs are common.
- If your income isn't steady.
- If you're retired (and most of your money is in more-volatile stock and bond investments).
You need less if:
- You have multiple streams of income
- You could get a job quickly
- You aren't living off both incomes
No matter your situation, it's my opinion that 3 months is the lowest amount you should ever hold.
Where do I keep it?
We want this money to be liquid. It should be in a high yield savings account and not in the stock market or crypto investments.
If you keep it in those, it's likely to be down when you need it. That risk is not worth it.
But, that's also why you shouldn't keep too much. High yield accounts, in today's environment, only return around 1%. If you want a year's worth of emergency fund, my opinion is that you keep 6 months in high yield account and the rest in the market. Just a personal opinion.
If you can't get to 3-6 months, anything is better than nothing!
If you don't have an emergency fund, it's imperative that you get one. Sell things from your house to make it happen. Make the sacrifice today and the investment in your future.