Our 2 Cents On Your Emergency Fund
Something we as a firm always talk to our clients about is the importance of maintaining an emergency fund. A few questions that may surface when the words “emergency fund” are brought up.
- How much is enough for me?
- Is there an amount that is too much?
- What counts as an emergency?
- What if I just can’t seem to accumulate that savings?
A short answer to all these questions is that the number will be different for everyone. Your number depends on different variables such as your cycle of life, health issues, potential real estate and family liabilities.
An example of an emergency could be the A/C in your home going out, and needing to replace it. For those of you who live in Fresno, you know that a failed A/C is definitely an emergency! So, how would you go about paying for that? You could use a credit card, but then you’re paying interest on the money you borrow. Having a sufficient emergency fund can help you prevent acquiring additional debt. Another example: if you’re still working and could potentially lose a job, you’ll want to be able to cover yourself through unemployment (which is currently about 21 weeks). Also, some simple health issues can be buffered from causing lasting financial damage if you’ve got some savings to use.
On the flip side, having too much of an emergency savings can also be ineffective. Sitting on cash that is not growing will slowly lose its purchasing power because of the Silent Thief, inflation. The opportunity cost of not having those funds work for you can be sizable.
The general rule of thumb is to have 3-6 months’ worth of monthly expense in an emergency fund. Much more than that you are leaving money on the table, and any less, you run the risk of needing to use debt to cover emergencies.