Maybe you have heard of the phrase “Emergency Fund” before but don’t know exactly what it means. This article will outline the benefits of an emergency fund, how to create one, and why we believe COVID-19 stressed the significance of being financially prepared .
- An Emergency Fund is used as preparation for large, unexpected expenses.
- Building savings into your budget can be an effective way to save for your Emergency Fund.
- COVID-19 has highlighted the importance of having an Emergency Fund.
What is Considered an Emergency Fund?
An Emergency Fund is a pool of savings that has been set aside to cover any significant, unexpected expenses. These expenses typically include medical bills, automotive repairs/replacement, lost income due to lack of employment, etc. These expenses can happen very suddenly and create a substantial financial burden on an individual or family.
How Much Should Your Emergency Fund Be?
The recommended size of an Emergency Fund varies by case, but we usually suggest somewhere between 3-6 months’ worth of expenses. If you are single with a stable income, you can afford to be on the lower end of the scale. However, if you have a family with irregular income, we recommend being on the higher end of the 3-6 month range.
How to Create an Emergency Fund
Creating an Emergency Fund does not happen overnight and can be difficult if you have a tight budget already. Most people need to build their Emergency Fund over time since they do not have a large sum of money just sitting around that they can relabel as “Emergency Fund.” This process comes back to the health of your budget stradgey and finding ways to squeeze out extra savings every month. By setting money aside every month, you can build your Emergency Fund over time until it reaches your desired level. It is especially iImpamportant not to draw from this fund for anything non-emergency-related since those withdrawals would only set you back towards achieving this savings goal. We also do not recommend investing this money in any shape or form since we want the funds to be readily accessible, and we do not want to risk the fund losing value.
Impact of Recent Events
Lastly, we wanted to discuss why we believe it is essential to establish an Emergency Fund. COVID-19 has taught us that the world we live in can change drastically in the blink of an eye. Many people were left unemployed and were concerned about continuing to pay their bills. (Granted, the government did help with the unemployment assistance, but that benefit was not announced at the very beginning.) This initial level of concern highlights exactly why an Emergency Fund is needed. Being out of work for three months could be detrimental, but it could also be manageable if you had the proper savings set aside. We are also seeing a considerable workforce shift as a record-setting number of individuals are leaving their jobs for new employers. This transition period can also be very stressful since it may present a period of time with no income. Once again, having savings can make this career shift much more tolerable.
Have More Questions?
If you have any questions about taxes, your individual investment portfolio, our 401(k)-recommendation service, or anything else in general, please give our office a call at (586) 226-2100. Please feel free to forward this commentary to a friend, family member, or co-worker. If you have had any changes to your income, job, family, health insurance, risk tolerance, or overall financial situation, please give us a call to discuss it.
We hope you learned something today. We will love to hear any feedback or suggestions if you have any.
Zachary A. Bachner, CFP®
with contributions by Robert L. Wink, Kenneth R. Wink, James D. Wink, and James C. Baldwin
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