Emergency Funds - How much is enough?
We are always reminding our clients of the importance of maintaining an adequate emergency fund and that it is never too late to start. We understand that saving can be hard, but it is certainly less difficult than being unprepared for a large expense.
We hear three common questions regularly, especially now, amid the COVID-19 pandemic.
Do I need to have an emergency fund?
Yes! One of the biggest mistakes that investors make is not having an adequate emergency fund in place. The coronavirus pandemic has undoubtedly reminded us of the importance of having a healthy amount of funds set aside.
How much do I need to have in an emergency fund?
Time and again, it is said that a good rule of thumb is to have three to six months of essential living expenses set aside. At Aevitas, we have always suggested that most clients have more, approximately six to twelve months' worth of expenses. Ultimately, the “right” amount is different for everyone depending on their unique financial circumstances such as job security, health, and family situation. The goal should be to have enough saved for essential living expenses to meet any unanticipated shortfalls.
An emergency fund is money set aside to cover an unexpected crisis or event such as:
Medical or dental emergency
Unexpected reduction of income
Large car repair
Where should I keep my emergency fund?
The funds should be immediately available – a traditional bank account, high-yield savings, money market account, or any other account that can be accessed quickly at a time of need. Emergency savings should not be in an account with early-withdrawal penalties, such as a retirement account. Whenever possible, emergency funds should not be subject to taxes or penalties. Contact us to discuss whether opening an interest-bearing account for emergencies is the right choice for you.
Many of our clients have asked if they should have even more in savings in these times of uncertainty. It’s never bad to have a heftier emergency fund, but you want to be smart in how much is set aside. At Aevitas, we continually review our clients' unique positions to be sure that emergency funds align with overall financial goals and plans. We also keep cash on hand in client accounts as part of an overall investment strategy and are always considering any known cash needs that clients may have. We are available to schedule a free consultation to discuss your situation and what makes sense for you. Our goal is always to help give financial security and extra peace of mind.