One of the most common questions I get from clients and prospects alike is ‘How much should I have in my emergency fund?’ The answer is not quite as simple as you may think as ‘it depends.’ The good news is this doesn’t have to be complicated so let’s discuss.

What is an emergency fund?

An emergency fund is a cash reserve you set aside in case of an unplanned financial event happens in your life. Some examples of this would be medical emergencies, natural disasters, or job loss. Ideally, your emergency fund should not be subjected to risk of market loss, in other words, invested.

How much should I have?

If you are like 95% of the population, you have probably searched the internet for the answer to this question. One of the rules of thumb for emergency fund is 6-12 months of living expenses, however some believe that is too much and say no more than 3 months of living expenses because your cash isn’t working for you.

Personally, I think the 6-12 month range is ideal because as we are seeing during this pandemic, your income situation may quickly change with no guarantee on when things change. Let’s explore each of these factors:

As I stated above, my answer is ‘it depends.’ It can depend on your age, health, your income, monthly budget and most importantly, your mindset. Personally, I think the 6-12 month range is ideal because as we are seeing during this pandemic, your income situation may quickly change with no guarantee on when things change. Let’s explore each of these factors:

• Age - If you are well into retirement, your investment portfolio risk level should reflect that and naturally have more short-term less risk assets, however, your health and mindset also play a factor in this. I would typically lean into a 9-12 month range for an emergency fund complimented by a well-diversified portfolio in this situation. This way, whatever happens in the market you should feel safe knowing you can pay your full living expenses for a year if needed.
• Health - Simply put, if you have a lot of out of pocket health expenses (keep in mind annual maximums) or are of old age, your needs might be higher and your E-Fund should reflect that.
• Income/Career/Monthly Budget - If you have a strong income in a career field that you may be able to easily find another job, then I would consider the risk a bit lower and lean toward the 6 month E-Fund, maybe even less assuming you are saving and investing your excess income.
• Mindset - Regardless of the above factors, I always tell my clients “If you cannot sleep at night because you are worried about your E-Fund, then it’s not enough.” I had a client near the end stage of her life with a large, well-diversified portfolio that she would never be able to spend down. She told me that she worried about it so much she wanted 2 years of living expenses in cash in her bank account. After discussing the pros and cons of such, she was still adamant, so guess what, she had 2 years of living expenses in cash.

Where should I place it?

Your emergency fund should be placed in a liquid, FDIC Insured, no-risk bearing account that hopefully pays some interest, like a savings account. The hard part is there are so many to choose from!

• Your personal bank may offer a high yield option
• Internet banks, meaning no ‘brick and mortar’ store options exist and many offer high yield options.
• Your brokerage account may also offer a savings account component.

What happens if I don’t think 6-12 months is enough?

As I discussed above, your mindset plays a role. One factor that needs to be considered is what other assets do you have at your disposal? If you have an invested, taxable (meaning, non-retirement) portfolio, then it is an EXTENSION of your E-Fund but invested in the market. Remember, your E-Fund should be instant access cash with no risk. On the other hand, your invested portfolio is slightly less ‘instant cash’ however it is exposed to risk- you want your assets to work for you.

How can I help?

If you have any questions about your E-Fund or want to run some scenarios to determine how much is appropriate for you, call me! I am always happy to discuss your situation. Remember, your E-Fund is but one component in your financial life and should be complimented by a well-diversified portfolio.
 
Conclusion

• For most, a 6-month E-Fund is adequate.
• Consider building your E-Fund in stages, over time. Build a 1-month E-Fund as quick as possible and then the rest over time.
• There are different factors that help decide how much to have in an E-Fund, carefully consider them all. 
• Consult with a Financial Advisor if you have any questions!

If you are not having frequent conversations with your wealth or investment advisor about market strategies, investment management, or financial planning opportunities, you should be, especially in a market like this! Momentum Private Wealth Management   specializes in Wealth Management as well as Comprehensive Financial Planning. Feel free to reach out to Austin directly at 512.416.8085 or austin@momentumpwm.com. You can also find out more information about MPWM at: www.momentumpwm.com .

You can also read more about Austin on his  LinkedIn Page ,  CFP® Professional Certificate Page   or on his  XY Planning Network Profile page. ​​

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