CuVantis Education Series
What is an Emergency Fund?
An Emergency Fund is a backup pool of money that usually consists of anywhere from three- to six-months’ worth of living expenses. As such, you need to know what your monthly living expenses are. By tracking your expenses with a monthly cash flow statement, you’ll learn how much should be in your emergency fund, and where you can cut back if you need to. If you are a two income household and job security is good, you may be able to get by with just a three-month emergency fund. If you are a single income household or job security is tenuous, shoot for six months.
When should I use this money?
This money should be designated and set aside for emergencies only. Many people practice what is called “put and take” savings, where they put money into savings every month because they know they should, only to end up taking it out by the end of the month to pay ordinary bills. Not only is this not an emergency fund, it’s really not even savings. Your emergency fund should be a “put and keep” type account where you add to it every month, and keep that money there for everything except a true emergency (unexpected loss of job, illness or injury that prevents work and incurs large bills, etc.)
How much should I add to my Emergency Fund?
Contributions to your emergency fund can be as little or as much as your monthly budget can allow. The key is that some contribution should be allocated in your monthly cash flow as a monthly fixed expense. Even after you’ve reached your emergency fund goal, continue to contribute as any excess amount that you build up over time can be invested or used to treat yourself to an unplanned vacation or other extravagance. The real benefit however, is that by continuing to contribute you have already built into your cash flow a mechanism to re-build this account after the unexpected emergency drains it.
How should I invest my Emergency Fund?
Safety is the most important attribute of this money. Don’t be tempted to risk that safety for a higher return. Many times the same economic downturn that causes someone to lose their job – and therefore have need of this money – is accompanied by declining investment markets. You’ll designate other assets for higher returns, but this money should be kept safe and liquid so that it’s there when you need it.
For help determining how much should be in your emergency fund, check out our Emergency Savings Calculator, or complete the form below to schedule an appointment with one of our advisors.
The information presented here is for educational purposes only and should not be considered financial, tax or investment advice. Please consult a qualified professional.