We often hear the question “Do I need an emergency fund?” or “How much do I need to have in my emergency fund?”
Let’s first explore what an emergency fund is and why having one is extremely important. It is a designated pool of money that is set aside to protect you and your family in the event of unexpected expenses and to provide reserves for health or other family related emergencies. This fund can protect you and your family in the event of a job loss or if you are out of work for any length of time. This fund creates a cushion when major household or vehicle repairs are needed, and can even serve as a stress reducer, increasing health and well-being.
The emergency fund is not used for planned purchases, like buying house, a new car, or college education. Those funds should be saved in separate accounts. Also, do not treat your emergency fund like a deferred spending account! These dollars are for emergencies and unexpected expenses only.
There is not a set amount for everyone, as it varies based on your lifestyle. For dual-income households, a good rule of thumb would be to have at least 3 months of living expenses stowed away. This is the total monthly amount it takes to run the household. For single-income households, it is wise to keep closer to 6 months of living expenses saved in your emergency fund. By doing this, you can stay ahead of your regular bills and keep up with the unexpected expenses.
Even once you are retired, the importance of emergency reserves still exists. There will always be unforeseen circumstances that will put you in a position to need access to cash quickly. Therefore, this fund needs to be liquid and kept in a simple savings account or money market account.
In closing, remember these tips:
1. Pay yourself first.
2. Be sure you have what you need and expect the unexpected so you will always be in position to respond to whatever comes your way.
3. In a society that encourages spending and to “keep up with the Joneses”, it is important to consider that the Joneses might actually be broke!!
Content in this material is for general information only and not intended to provide specific advice or recommendations for any individual. No strategy assures success or protects against loss.
Securities offered through LPL Financial, Member FINRA/SIPC. Investment advice offered through Independent Advisor Alliance, a registered investment advisor. Independent Advisor Alliance and Marzano Capital Group are separate entities from LPL Financial.