Everything you need to know about emergency funds
Seth Burstein
April 27, 2022
In addition to all the planning you do for your short- and long-term goals, you also need to plan for the unexpected. Sometimes those surprises are great, like a larger than expected bonus from work. Other times, they’re not so great. This is why everyone needs to have cash on hand - aka an emergency fund.
Emergency funds are for those rainy days when either an unexpected expense crops up or you have a material and unexpected change in circumstances. Your roof gets a leak, your dog needs surgery, or you lose your job. You need access to cash - and quickly. This is where it helps to have a financial buffer that requires zero effort, thought, or time to liquidate.
How much should be in my emergency fund?
We recommend calculating your emergency fund at about three to six months of expenses based on your household income and number of income earners. This amount should keep you covered in the event of something drastic without putting you in a position where your hard-earned cash is losing value due to inflation. Remember: you don’t want too much money sitting around in a bank account. It is always better to have your money in the stock market working for you.
Where should I keep my emergency fund?
Your emergency fund should be kept accessible in your checking or savings account - but don’t touch it for anything other than emergencies! Any short-term goal you might be saving for, like a vacation, home purchase, or sabbatical - should be saved for separately. If you need to spend the money in your emergency fund for, well, an emergency, let go of any guilt and thank yourself for providing that security. Once things have returned to a more normal state, be sure to build the fund back to your targeted amount.
Invest your extra cash
Unfortunately, research shows that people’s ability to save for emergencies varies wildly in the United States. 23% of Americans have more than 6 months of cash stashed away (this is too much) while 26% of Americans have no emergency savings at all. If this is you - don’t worry. You can always begin saving in small amounts today to get you to your goal. If you have too much, that’s fine, too! We will help you figure out your path forward.
Use Fortunately to discover how investing extra cash can get you to your financial goals faster.
Seth Burstein
April 27, 2022
