The Importance of Having an Emergency Fund
By Mary Jo Lyons, CFP®
Hurricane Harvey, may he RIP, has reminded me of a very important lesson. I am guessing it’s one that is now on the minds of many.
The importance of an emergency fund.
This year has been a tough one for me and for friends and family alike. We have experienced many challenges but there have also been many blessings that have emerged along the way.
“Trouble chases sinners, while
blessings reward the righteous.”
An emergency fund, how important is it and how much is enough? The standard rule of thumb is 3 – 6 months of household income. The more you make, the older you are, the larger your footprint the more it should be. As you approach your 50s enough to cover a year’s worth of expenses is a realistic goal. As you age and your income increases the harder it is to replace in case of a job loss.
Consider this…you are suddenly impacted by a category 4 hurricane. A timely visual many can now relate to. Use it as a metaphor for any of life’s sudden storms.
… your home is lost or severely damaged due to windstorm damage or flood waters?
… you were finally able to buy that coastal vacation home that you have always dreamed of and you found that it was suddenly washed away?
… you had a mortgage on that property and were dependent on rental income and you could no longer rent it?
… a child is badly injured in a car accident and you are suddenly hit with the expense of an unexpected hospitalization and multiple surgeries?
… an adult child or grandchild has a sudden medical crisis, a problem with addiction or PTSD for a returning soldier and you want to help?
… an adult child or grandchild with young children suddenly loses a spouse and needs immediate support for their family?
… a parent is suddenly diagnosed with dementia, can no longer live independently, has no Long Term Care insurance or significant savings of their own and needs 24 hour care?
… you find a great deal on a cruise? What if you are at a car auction and that classic car you have always wanted is for sale? No, No, No …. Those are not emergencies. An emergency fund is not for spur of the minute vacations, it’s not for luxuries or impulse purchases.
HOW TO GET STARTED
Establish a short-term goal, say $30,000. Do whatever you can to make this happen: work extra shifts; save your annual bonus; downsize your house now that the kids are grown and you don’t need the extra space; sell that old car in the garage that you always planned to work on but never get around to; save that small inheritance you received from Aunt Irma. Just start somewhere but make it a top priority. Be disciplined.
Once you reach your short term goal raise the goal. Figure out what your number is and make it happen. My number is $100,000. An emergency fund should be in cash. It should be isolated in a separate account. Consider keeping 3 months income in cash, and then a series of short term laddered CDs, each with a balance of 3 months of income. Maintain a separate account for random expenses such as a vacation, clothes or dental work.
What if you made a plan and executed on it? Ahhhhh now that’s confidence inspiring. What a great feeling.