It is so simple of a concept, but one that is easy to fail. The general rule is to keep 3-6 months living expenses, somewhere available, for safety. Those early in their careers with less dependents and less overhead will find this very manageable. Those of us with a few chips in our armor from big recessions, life’s curve balls, and experience, may want this number to be higher. Whatever level makes “You Sleep Better” within reason of course, is likely a good level.
Reasons for a Higher Level
- Possible Job Change – Need to be higher on emergency funds
- New Family Member- Higher is better
- New Home – Expect unforeseen expenses – they always occur (Has anyone ever built or bought a home in less time and for less money than they thought? Nope, it’s in our nature)
- Salary Fluctuations i.e. Commissions – Error on the higher side of that emergency fund
- Others dependent on you – Business owner, large family, solo income earners, college or wedding – A bit higher is better
Stability Reasons for a Normal/Lower Level
- Dual Similar Incomes – Lower Emergency fund is ok
- Very stable Job – Smaller side of the living expenses will work
Where to Invest ? Safety first
A long time friend always commented on the Mason Jar, full of money, buried in his back yard (an old depression era tale) – all kidding aside, your emergency fund should be bullet proof safe. While that has been hard over last decade, not earning much interest, now finally we can get a few percentage points on our Emergency Fund, but that is only to keep it from being lazy, it is not an investment and should not be put at risk by stretching for a return. No risking, it needs to be there when the sky is falling.
The most obvious benefit to having a health Emergency fund is less stress. Financial issues are well known to be a couples top stresser and frequently relief is felt as the healthy emergency fund is completed, when no pressure was ever felt in the first place.
Have a Great “Healthy Level” Emergency fund day!
John A. Kvale CFA, CFP