- About WCG
- Our Team
- Our Services
- Sustainable Investing
- Account Access
- Join WCG
Emergency Fund: Don't Financial Plan Without ItSubmitted by The Wealth Consulting Group on November 19th, 2019
- An emergency fund is a cash reserve held for unforeseen, immediate emergency needs
- Emergency cash reserves should hold the equivalent of three to six months of living expenses
- An FDIC insured cash savings account is a good place to hold an emergency fund
It is hard to deny that one of the great advertising campaigns of all time was “don’t leave home without it.” Established in 1975 by American Express to refer to their traveler’s checks and later used to refer to their credit card offerings, it is fascinating to observe the effect that this little slogan has had for multiple generations of consumers, particularly as we move further towards a cashless society. As far as financial planners go, if there is one topic that should be forever planted in the client’s psyche it just might be the emergency fund. Perhaps the saying should go, “don’t financial plan without it.”
WHAT IS AN EMERGENCY FUND AND HOW MUCH SHOULD YOU HAVE IN YOUR EMERGENCY FUND?
An emergency fund is a “rainy day” cash reserve for unforeseen, immediate needs such as emergency medical care, emergency home repair or income replacement due to job loss. A properly maintained emergency fund may allow you to avoid tapping other resources such as credit cards or long-term retirement savings, which could subject you to taxes, penalties and interest charges and negatively impact financial goals. It is recommended that you maintain three to six months of living expenses in an emergency fund. If you have a nonworking spouse and support dependents, have fluctuating levels of income and/or work in a career with high turnover, it is recommended that you have the equivalent of at least six months of living expenses.
HOW DO YOU BUILD AN EMERGENCY FUND?
First, determine your estimated monthly cash flow surplus. Monthly cash flow surplus is calculated by subtracting taxes, living expenses and savings from gross income. Once determined, save that amount monthly until the desired level of cash reserves has been accumulated. And voila! You have yourself an emergency fund.
I HEARD THAT THE STOCK MARKET HAS DONE REALLY WELL. SHOULD AN EMERGENCY FUND BE INVESTED IN STOCKS?
Nope! Stocks have historically performed well over long time horizons, but prices could move significantly even on a daily basis. Even fixed income investments that have no default risk, such as US treasury notes, may be subject to meaningful price fluctuation. Since an emergency fund must be available for highly short-term needs, it is important that the balance is stable, secure and easily accessible. Therefore, one of the best places to park emergency cash reserves is an FDIC insured savings account. Several online banks are FDIC insured and may offer cash savings accounts with higher interest rates than brick and mortar financial institutions.An emergency fund is typically a top priority in a financial plan. In some instances, your advisor may recommend paying off high interest credit card debt and/or receiving a 401k employer matching contribution as other top priorities. However, because an emergency fund is held to cover immediate, unforeseen cash needs that could derail an otherwise sound financial plan, it is easy to see why you “don’t financial plan without it.”
As always, please reach out to your trusted advisor with any questions.
Securities offered through LPL Financial, Member FINRA/SIPC. Investment advice offered through WCG Wealth Advisors, a registered investment advisor. WCG Wealth Advisors and The Wealth Consulting Group are separate entities from LPL Financial.The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. Investing in stock includes numerous specific risks including: the fluctuation of dividend, loss of principal and potential illiquidity of the investment in a falling market. Government bonds and Treasury bills are guaranteed by the US government as to the timely payment of principal and interest and, if held to maturity, offer a fixed rate of return and fixed principal value. Investing involves risk including loss of principle.