A recent study showed that 57% of adults in America have less than $1,000 in savings which is very alarming. When we go through financial plans and help people navigate different situations, things tend to come up that you’re not expecting and not budgeted for. Things such as housing problems, automotive issues, health problems, and even job loss can occur therefore, it’s very important to have an emergency fund set aside in case these types of situations or other unplanned events arise.
What is an Appropriate Emergency Fund?
The textbooks will tell you 3-6 months of basic living expenses in liquid cash savings is what you need for an emergency fund. Typically, if you have two similar sources of income, such as two working spouses that make close to the same thing, then three months’ worth of living expenses is more appropriate to have saved up. If you have one main source of income in a family, then it’s best to have six months’ worth of income saved up. The theory is that if you have two sources of income and one person unexpectedly loses a job then that three months’ worth of savings plus the other person’s income can get you 6 months’ worth of living until the jobless person starts back to work. If there’s only one source of income and that person loses their job, then obviously that family would need more savings to cover the gap until he/she found a new job.
We recommend that those emergency fund assets be segregated from any other assets that you may have. These funds are not merely for rainy-day use or spontaneous vacations. These assets should truly be segregated for emergency purposes only. Often, we see people blend their emergency funds in with all their other funds. When that happens it’s easier to spend the money earmarked for emergencies only, on other things. One tip to make things easier, psychologically, is to put your emergency funds at a different institution or bank other than where your checking account is. You can still link your accounts and still transfer money from the emergency fund to your checking account through a longer process however, having it at a different location where you can’t simply click a button and move it from savings to checking really helps with that psychological thought that it’s truly an emergency fund. Online banks, money market accounts, short duration bonds and mutual funds that typically are light cash, are giving you a higher yield right now than what a traditional bank might could give you. If you’re truly not going to use those emergency funds unless you do have an emergency, then by putting that money into one of these types of accounts can potentially get a return of over 2%. Obviously, that number is subject to change but right now that’s a good option. Emergency funds are extremely important and are typically one of the first things we tell people to try to establish when putting together their financial plans. Not only will it protect you if something bad or unforeseen happens to you and your family, but also give you peace of mind knowing that you have it there if something ever did happen.
Fi Plan Partners is an independent investment firm in Birmingham, AL, serving clients across the nation through financial planning, wealth management and business consulting. Fi Plan Partners creates strategies in the best interest of their clients using both fee based investing and transactional investing.
The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. All performance referenced is historical and is no guarantee of future results. All indices are unmanaged and may not be invested into directly.
Economic forecasts set forth in this presentation may not develop as predicted.
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