The Emergency Fund: How much and how to get there?
By: Steve Frazier
In the financial planning process, we are asked all the time how much cash should be on hand.
While the answer isn’t always met with agreement or excitement, it can be summed up simply as three to six months. That’s three to six months of essential living expenses in an interest-bearing account that is liquid and relatively stable in value.
What does that mean? It means you either need to start saving or you need to move assets to someplace that gives you this ability. The emergency fund is step 1 in the financial planning process and can be the quickest path to being prepared for market swings, uncertain job markets, and an inevitable recession.
If necessary, start slow and increase through time. Just a small amount can make a big impact when the unexpected car or house expense pops up. Think about how excited you were last time you had to find $500 to fix your brakes. It is less painful when that money is in a bucket designated just for this.
Look at the emergency fund as paying yourself first. It becomes a non-discretionary expense on your balance sheet and budget. Do yourself a favor and arrange your bank account to automatically transfer a set amount from your paycheck to your savings account on each payday.
Use a savings app to save every time you buy something with your credit or debit card. Many of these apps move change from an uneven transaction directly to your savings account. Or if you still use cash, keep a change cup in your car to actually collect the leftovers; converting the sum to a meaningful amount each month.
Don't forget to add lump sums to your savings. This means your Christmas bonus, family gifts, and tax refunds until you get to your goal. Really this becomes the most measurable progress in your plan. Treat it as found money.
Lastly, have fun with it. After all you are giving yourself the ability to feel prepared, pursue goals, and upon success invest in other parts of your life.