Do You Have An Emergency Fund?

Dear “Ready to Transform Your Finances”,  So, you have decided that you are ready to up your personal finances game. You saved an extra $100 last month, and you are ready to invest it. You’ve been looking at brokerage firms, like Fidelity and Robinhood. You are ready to take the plunge. But, hold on a minute. I have one question for you. Do you have an emergency fund? If yes, is it funded at least to the minimum recommended amount? 

What Is An Emergency Fund?

An emergency fund is money that is set aside for a large unexpected expense. For instance, what if you lost your job? How would you pay your rent or mortgage? How would you pay your phone bill? And what about your utility bills? You should not have to start selling your investments. You certainly don’t want to dip into your retirement funds.

Not, only would doing so put you behind in retirement funding, it could also cause you to have to pay some hefty penalties. 

Another benefit of having an pool of money to use in a monetary crisis is that it prevents you from having to rely either credit cards or high interest loans. 

If you have a fully funded emergency fund, the money in it would be there to cover your living expenses for a period of time while you look for a new job.

What Is The Goal of An Emergency Fund? 

Put another way, the goal of this bucket of money is to make it so that you can financially survive when you have major unforeseen expenses or total loss of income.

Ultimately, your emergency fund should allow you to maintain your basic necessity standard of living without selling your investments or dipping into your retirement funds. 

What the Emergency Fund Is Not For

Once you get some money built up in  your emergency fund, you may start thinking that you can start treating yourself with the money, perhaps a cruise or a new car. (Did I hear someone say that they want a new Jeep?) Well, no, that is not the purpose of  emergency funds. 

Money in this account is not considered part of your long term savings such as money saved for something like college tuition or buying a new car. 

The cash in an emergency fund is also not for small unexpected expenses either.

There are various funds that you can set up for those expenses. But building up an emergency fund should be one of your first financial goals.  

How Much Should I Keep In My Emergency Fund? . 

I believe that I read or heard somewhere that there is at least one financial content creator that considers $1000 to be enough for an emergency fund. I don’t. 

Traditionally, it had been suggested that you have a minimum of three months of your basic living expenses saved in your emergency fund. (That means the minimum that you need to survive, and does not include things like eating out.)

More recently, as a result of COVID and inflation, the minimum amount being recommended by some of the big names in personal finance is 6 months worth of expenses. I think that that’s a good start.

However, after you celebrate that goal, I’d like to see you shoot for a minimum of 12 months of your basic living expenses. 

These suggestions may seem difficult. But here is the thing…Building an emergency fund takes time. Just get started and keep going.

What Is The Best Place To Keep An Emergency Fund?

You need to keep money somewhere it is safe and not exposed to market volatility. You also need to be able to access the money quickly if you need to do so. This means do not invest it in the stock market. Instead, you want to put it into a savings account…but not just any savings account.

 

An average yielding savings account would not be a good choice for an emergency fund, because using one would mean having a chunk of money sitting in an account receiving minimal interest. 

Instead, I suggest that you put the cash  into a high yield savings account or a money market fund, so that it can earn as much interest as possible. 

Those good choices for emergency funds.

My favorite bank for high yield savings accounts, especially an emergency fund, is CIT Bank. I bank there because of their high 4.05% APY (at the time that I am writing this) on their Savings Connect Money Market Account. 

  

Wherever you hold your emergency fund, it should be connected to your checking account so that you have access to it in case of an emergency.

Key Takeaways Regarding Emergency Funds

• An emergency fund is money that is set aside for large emergencies, such as the loss of a job.

• Having cash for a monetary crisis should be one of your first financial goals. 

• It’s good to have a shorter-term goal of having a 3 months emergency fund. 

• It is better to have a longer range goal of having enough money to cover 6 months of unemployment.

• This account is not for smaller unexpected expenses.

• This money should be kept in an account that is liquid while at the same time giving you as much interest as possible. 

• A high yield savings account is an ideal place to store emergency funds. 

If you have an emergency fund, terrific! I encourage you to keep building it until you reach your goal for the number of months that you want it to be able to cover.

If you don’t have one yet, I suggest that you do yourself a favor and start one right away.  

As always, I hope that you are doing very well… mentally, spiritually, physically, and financially. I am here to cheer you on. 

Hugs,

Rich Mom 

P.S. Life is full of ups and downs. Unfortunately, we don’t get to pick when and what those downs are. Please prepare yourself by saving for those occasions. 

Would you like to learn more about emergency funds? Check out: 

What Is An Emergency Fund?

Interested in reading about more ideas to improve your financial situation? Check out:

Small Passive Income Is Better Than No Passive Income

Start Creating Passive Income Today

Rich Automatically

Looking for financial resources? Check out the Rich Mom Poor Kid Resources Page.

Who is Rich Mom? 

If you’re wondering who Rich Mom is, check out my “About Rich Mom” page. 

Also, please note: I am not an investment advisor. Always do your own due diligence and research before investing. Check with your own investment advisor. 

The information shared here is not intended as financial advice, just encouragement.

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