Emergency funds. While they are not a fun topic of financial planning, they are crucial and essential for everyone to have.
An emergency fund is money set aside for exactly that: emergencies. We don’t always know how or when an emergency will happen specifically, but we do know it’s possible for an emergency to occur at any time and to anyone.
Recently, we’ve seen an interruption to our normal lifestyle as a result of the COVID-19 pandemic. We have found ourselves limited to our living spaces and working from home or, unfortunately, out of work. We’ve witnessed a shortage of regular household items like toilet paper, bottled water, and soap. And some of us have been affected by an emergency-like result due to the severity and length of this unprecedented crisis. Regardless of your individual situation, you can use this as an opportunity to make sure you have an emergency fund in place.
How much money should be kept in an emergency fund?
As everyone’s situation is different, there is no set dollar amount to maintain in an emergency fund. If you don’t have an emergency fund currently, it’s advised to plan to set aside $1,000 to start. You can then tackle building your emergency fund once you have collected that amount. As a rule of thumb, the amount you should have saved in a fund is the equivalent of three months worth of expenses. If you don’t have a monthly budget in place, examine what you’ve spent over the past three months and determine how much you’ll need for your emergency fund.
Additionally, those with dependents may want to increase your emergency fund to cover up to 12 months of expenses. Emergencies happen unexpectedly. An emergency fund of three to 12 months of expenses can provide peace of mind in the middle of chaotic times knowing you have money set aside to cover your expenses during that period.
Where do I store my emergency fund?
Your emergency fund should be held in an account where you have immediate access to the funds as liquid cash. You don’t want this money tied up in a CD or invested in the stock market. It may be wise to have the emergency fund separate from your regular checking or savings accounts. Keeping the emergency fund isolated may serve as a reminder not to touch the funds unless there is in fact an emergency.
Prepare now for the unexpected
Creating an emergency fund for yourself in the event of an emergency will help you during a time of uncertainty. Start with realistic goals and aim to build a fund of $1,000. From there, you can save to retain a fully supported emergency fund of at least three months of expenses. Keep these funds easily accessible for a time of emergency. Being financially prepared now with an emergency fund can provide some stability for the future. To get started or speak to a financial advisor, please contact us.