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Stuff Happens. Is Your Emergency Fund Ready?

Aug 20, 2020 5 min read

Key takeaways

  • Rainy-day savings of three to six months’ living expenses—or more—should be your top financial priority.
  • Emergency funds have to be there when you need them—even at the cost of earning potential.
  • CDs or conservative investment accounts can make sense for some of your emergency stash.


Forgot to hit the ATM before saying “fill ‘er up“? Pull out the plastic. Need a new transmission or—even worse these days—you or your partner facing a layoff? Time to tap the emergency fund.

An emergency fund is exactly what it sounds like: Money you set aside for a “rainy day,” i.e., to cover unexpected expenses—usually big ones.

Along with paying off revolving debt like credit card balances, an emergency fund should be your first financial priority. That’s ahead of saving for a down payment on a home, funding your kid’s future college and even investing for your own retirement.



What price for safety?

Conventional wisdom holds that you should keep your emergency fund in a place that’s supersafe and readily accessible, like a bank savings account (or even under your mattress).

That’s true, to a degree. But a newer school of thought asks, “With interest rates so low recently, why set aside a pot of dough you hope never to use in an account where it’ll earn next to nothing?” (Worse, because inflation eats away at your spending power, in real terms your money could earn less than nothing.) Besides, not every emergency (think unexpected medical costs or mortgage payments if you lose your job) will demand that you have your cash (or check) in hand that day (busted water heater in mid-January).


Strike a balance

The trick is to tread the line between reasonable liquidity (knowing your money will absolutely be there when you need it) and growth (aiming to earn enough to at least keep pace with inflation).

So, for a little extra oomph, you might consider casting at least some of your safety net in a certificate of deposit (CD) that matures in a few months to a year, or even in a conservative investment account—the kind that holds a fair share of “cash” and fixed-income investments (bonds), maybe along with some stocks. True, if you need to tap it, you might not have the money for a few days (or weeks or months for a CD without penalty). But realistically, how many emergencies will demand immediate access to cash?

If you go this route, it may be best to oversave—target a larger emergency fund than you might if you were to stick with a savings account (or inner springs) alone.


How much is enough?

Experts recommend saving (are you sitting down?) at least three to six months’ living expenses. So total up what your household spends in a typical month—everything from gas to groceries, mobile bill to mortgage payments. For emergency purposes, separate the must-haves (say, diapers) from the nice-to-haves (dinners out) from the, well, seriously? (day-glo lattes). Then take the former and multiple by three (to six or more).

Of course, building a five-figure (or bigger) emergency fund can be a tall order, so start small—and save steadily.


What you can do next

Take advantage of bank programs that automatically stash a few cents off debit card transactions—or, better, sweep a monthly amount—into your savings account. And think outside the house: You might be able to raise cash by selling clothes you no longer need, along with books, furniture, kitchenware and electronics. Earmark that extra money—plus earnings from side gigs, surveys, whatever—for emergencies.

Also examine your benefits plan to see if you’re taking full advantage of what your employer already offers. For more help saving money, look into discount programs, partnerships and affinity offers.


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