Emergency Funds: How Much Do You Really Need?

Let’s talk about emergency funds…or…

Freedom Fund.

“Oops” account.

“Rainy Day” Fund.

“$ht hit the Fan” account.

But having an emergency fund is important to anyone’s long-term financial well-being, as you see it. In a pinch, the emergency fund is a safety net that helps you avoid unnecessary debt and survive the financial crisis, helping you get back to your feet after countless unexpected curveballs are thrown in your way.

Most people consider the emergency fund as a savings account that saves 3-6 months of money.

What is an Emergency Fund?

An emergency fund is simply cash you have set aside to cover unexpected costs. When you think about your money, you have your “normal” income and expenses. This includes rent or mortgages, utilities, car payments, insurance, groceries, and more.

But what happens when your car needs a new transmission? Or will the pipes explode in your home? Or do you suddenly realize you’re losing your job?

That’s where the emergency fund comes in. It’s cash on hand to pay these costs, so you won’t get into debt (or any more debt) or worse, you simply can’t pay and you’ll have to deal with the issues further.

How much do you really need?

For many, the answer to this question is found through the recommendations of those considered financial “experts.” But contrary to what you might think, a quick study of the expert’s financial advice may not provide a concrete solution. In fact, it may be very well confused with the point of giving up your quest to properly fund “EF”. After all, when you are facing multiple options, it can be difficult to make a decisive choice.

“Save 6 months’ expenses”

“Saves a year’s expenses based on the naked bone budget.”

“Save $1,000 with Baby EF”

All of these options are examples of expert advice shared daily. With all the options, which method are you supposed to decide on how to adhere to?

The key to successfully navigating water is to remember that setting up, funding and using EF is a personal decision. No matter what advertising is as the best way for professionals to establish an emergency fund, you need to adjust your approach to your own personal situation. Remember,Personal finance is personal.

So whether you save a month, six months or 12 months, the point is that you’re saving something. This is especially true if you’re just starting out yourself.

Save something. Anything.

How to build it

Once you start building an emergency fund by saving as much as you can, the following tips are worth remembering:

• Fund your account regularly. One of the most important elements of an emergency fund is the actual funding of your account. It should be automatic, like doing it every week, month, or year. If you are struggling to pay your bills now or satisfy your obligations, consider how beneficial a bit of breathing can be. Even if it’s just $25 a month, there’s always something better than nothing in this case. Find the best online checking accounts to get an account with excellent rates and rates.
  
• Overestimate what you think you need. One caveat to fund EFS is that people miscalculate only the amount they need. If you want to base your account balance on a fixed monthly fee, you need to build a little buffer to help you navigate the inevitable visits you receive from Murphy.
  
• Use an individual account. Emergency funds should not be held in daily checking accounts that you use every day. It should also not be summed up in long-term goal savings such as House Down Payment Funds for Homes and future university tuition fees.
• Adjust your approach to your specific situation. Once you find the plan that best suits you, don’t forget to make sure it suits your specific needs. Based on your predictions based on factors such as the number of income flows you/your family has, Medical needs, childcare costs, etc.
  
• Don’t forget that EFS is fluid. In particular, just like life situations, emergency fund balances can always be changing. You may need to spend some of that funds, but once you recover from any set dates or challenges that require the use of the money, you should also work to exchange the funds listed above. By treating EF as a fluid entity, you take you a step closer to maintaining financial freedom.

Where do you place it?

Once built, you need to store your emergency funds in a high-yield savings account or money market account and work for you. You can either look at your CD account or consider it, but it will tie your money a little.

Why are these types of accounts, not just your checking account (or money under the mattress)?

Because when you have enough money to sit and wait to use, you want to gain interest in it. Having money in a savings account or money market account will earn you passive income through interest. It may not be a lot of money, but it is free money to do nothing with your emergency fund money!

Alternatives (used at your own risk)

Let’s talk about some of the options for accessing cash in emergencies. Savings accounts are kings (because cash is kings), but there are other options to consider. However, these have advantages and disadvantages and should only be used by certain individuals.

When you think about emergency funds, you want:

• It must be cash or equivalent (i.e. gold, artwork, etc.)
• It must be relatively fluid (i.e. funds are required within 3 days)
• It must be safe – often you need cash when the stock market or economy is in turmoil. If you don’t have “safe” assets, what you thought was $100 would actually be $50.
• You should be able to add or reduce your accounts relatively easily if you want

Credit Card

Credit cards are one of the more popular alternatives to the Emergency Fund, especially for those who don’t have debt, who pay the full amount each month and use points. If you have a great reward credit card, you can earn substantial cashback to use it as emergency funds.

Also, some credit cards, like the American Express Platinum, allow qualifying individuals to spend what they need.

The big drawback is the high interest in any balance you may carry and the very low risk that you can see you close your card when you need it the most. In fact, early in the Covid-19 emergency, Chase and American Express closed thousands of accounts, reducing the balances of even more accounts. They did this to reduce their risk. If you are a user, you may be in trouble if you need to use the card.

Strong Points:Easy to access and can be used to pay almost anywhere.

Cons:High interest, potential for closure.

Home Equity (HELOC)

If you own a home, leveraging your equity is considered by many people as a potential emergency fund. This is especially true when an emergency involves repairs to your home.

Sounds attractive when using your home as emergency funds – low fees can use a debit card, etc. – it also comes with risk.

The first risk is simply that you pay interest on it and if you don’t, you could lose your home. However, this is quite minimal as mortgage interest rates are among the record lows.

In my opinion, the greater risk is that in a real financial crisis when you may need to access money, your bank can freeze your Helock and prevent you from using it. Banks are allowed to do this to limit risk and will freeze you from simply using your helock if you think your home has fallen. This took place during the last housing crisis of 2008-2010.

Strong Points:Large amounts of available, low interest rates from HELOCS

Cons:You may be tied up in your home and freeze.

Portfolio Credit Line

If your taxable account has a large portfolio, you can use that money with the portfolio’s credit line. This is the number of investors who have access to cash without selling their investments.

Rather than having to sell the stock and pay capital gains tax, a savvy investor simply uses the portfolio credit line to get a loan at a low interest rate. Many brokerages can borrow from a 35% to 50% range of the value of a portfolio at a lower rate from 3.5% to 8%.

If you have a substantial portfolio, this is an attractive alternative. The risk is that if the value of your portfolio decreases, you may be subject to a margin call. It is when a brokerage requires that some (or all) of the loan be repaid, or sells assets to repay the loan. In a financial crisis, this can be a bad situation when inventory drops.

Strong Points:Low-cost access to capital avoids capital gains tax

Cons:If the asset price drops, it is subject to a margin call

If you don’t have emergency funds

In addition to using alternatives, there are cases where emergency funds are not required. I reserve this as an “advanced tactic.” Because that means you have a big grasp of your income and expenses.

Here’s a great video on this concept from my friend Tyler (whoever Interviewed on a podcast):

Final Thoughts

Having an emergency fund is essential, especially when you begin your personal financial journey. Despite gaining a little wealth, it is a useful tool to navigate the inevitable “unexpected” costs you will encounter.

If you have a critical portfolio, it may seem worthwhile to try out a cash alternative in a savings account, but at the end of the day you may have “cash is king” and “not productive” cash, but peace of mind is usually more valuable than the marginal returns you receive.

How many benchmarks do they maintain for the Emergency Fund?