What’s an Emergency Fund and how much should be in it?
Your Emergency Fund is your savings account that has no risk to principal—so it’s in cash. The purpose of your Emergency Fund is just as it sounds-for emergencies! Emergencies can be losing a job, unexpected home repair, illness, major car repair or your pet needs surgery—really anything that is completely unexpected.
So how much should be in it?
The general rule is three to six months of expenses. I typically lean towards the six-month number for my clients. This way if someone loses their income source, we know that they have six months to figure out what is next. For retirees, this emergency fund is higher because you are not going out to find another job. Every situation is different and depends on your goals. Other considerations are job stability, household size, self-employment, local cost of living and debt. People also have different comfort levels that may require more in a liquid emergency fund.
Is it really ok to use it for emergencies?
So now that your Emergency Fund is established, it is ok to use it for those emergencies. My dog tore her ACL and had to have surgery last week. I was not expecting that expense and was really stressing about it. However, I had the money to cover this expense in my emergency fund. I think my reason for being stressed about this was that I had ‘earmarked’ these funds for a different kind of emergency. In my head, that money was our ‘in case we lose our job and need to pay the mortgage money’, not the pet surgery fund. I was able to shift my mindset back to reality and be ok with spending that money at that point. Once you use some of it, then you build that fund back up so that the safety net is there to catch you the next time!
Financial Journey LLC is a registered investment advisor offering advisory services in the state of Virginia and in other jurisdictions where exempted. Information provided is for educational purposes only and not, in any way, to be considered investment or tax advice.