Emergency Funds are often overlooked in the grand scheme of retirement savings. Most people seem very indifferent about having a large amount of money “doing nothing”. In all reality that money is doing much more than that – Emergency funds provide peace of mind and insurance against unforeseeable events in the future.
What is an emergency fund?
Simply put, it is a fund for emergencies only. It is typically able to cover 3-6 months of expenses and needs to remain highly liquid and accessible. This does not mean your emergency account shouldn’t be earning you interest, but you may have to sacrifice some interest for the ability to have your money immediately.
Your emergency fund should only be used for unforeseeable emergencies, these emergencies typically include job loss, medical or dental bills, or necessary home/vehicle repairs.
What is an emergency fund not for?
You do not want to dip into your emergency fund unless it is absolutely necessary to do so. Buying the latest smartphone, updating your guest bathroom, or going on a much needed vacation are a few things you don’t want to find yourself using this emergency fund for. Remember, it is called an emergency fund for a reason.
In the video below our Chief Investment Officer, Steve Davis, walks us through some of the basics of emergency funds.