RAINY-DAY AND EMERGENCY FUNDS
preparing for life’s inconveniences and opportunities
I’ve received many questions regarding emergency funds lately. Why? Because they’re so important! While we can’t know everything that lies ahead, we can be prepared for life’s inconveniences and opportunities.
What is it? An emergency fund/rainy-day fund/cash cushion/whatever you like to call it is a pool of money that allows you to be prepared for the unexpected financial emergencies or opportunities that arise in life. This can cover any thing from the loss of income from your job, medical expenses, to car and home repairs. Having this fund can give you the freedom to walk away from a job to find one you love, pay unexpected expenses without incurring high-interest rate debt, and know that you’ll be OK financially.
Who should have one? Everyone should have a rainy-day/emergency fund. “Everyone” includes someone working part-time at an ice cream shop, a retiree, a CEO of a fortune 500 company, and all those in between.
How much should be in it? This is where things vary based on each individual situation and as we always say in financial planning “it depends”. The rule of thumb is that you should have three to six months of living expenses saved up. As with most rules of thumb, it’s a good place to start but some modifications should be made to fit you as a unique individual depending on the uncertainty in your life and your comfort level . For example, if you work in an industry where finding a new job would take a considerable amount of time if you separated from your current position, you would want to save a little more. Among other things, you should also consider how you’re insured: disability insurance (how much will it cover?), health insurance (what’s your maximum out of pocket?), etc.
When and how do I start one? Don’t worry if you don’t have your fund established or completely funded yet and know that you’re certainly not alone. It’s a goal that you can work towards over time by setting up an automatic savings plan, depositing a bonus you receive, or even using your tax refund. The important thing is that you get started.
Where should the fund be? While you want to have that cash cushion available to you if an emergency occurs, you don’t want a large amount of “lazy money” lying around that isn’t earning anything. This is where we can talk about how much needs to be able to be accessed at a moments’ notice (your hot water heater bites the dust) versus how much we are comfortable to wait a few days for a transfer to complete (you separate from your job). From there, we’ll allocate the correct portion of the fund to a bank account, high-interest savings account, or perhaps even very short-term investments.
Have more questions or want to chat about your emergency fund? Contact us!