By Joshua Robbins, CFP®, CDFA®, AIF®, Associate Wealth Advisor
Picture this: Life is great. You’re working a fantastic job making enough money to comfortably cover your bills and expenses. You’re able to go out to your favorite restaurants and may be planning that next big summer vacation.
But what would happen if you lost your job? How long could you support yourself? What if your car breaks down or your water heater goes out? What if you have an unexpected medical bill? These may be extreme examples, but they all convey the simple notion that life is unpredictable. This is where an Emergency Fund comes into play.
So, what exactly is an Emergency Fund?
In simple terms, an emergency fund is a cash reserve set aside to help soften the blows of life’s unexpected challenges. These reserves should be maintained separately from your current checking and savings account balances.
Who needs an emergency fund? Everyone—especially individuals who are still in the ‘accumulation’ stage of life. The accumulation stage simply refers to individuals who don’t necessarily have much in liquid investments like stocks and bonds. In other words, people who are actively saving up for their futures and are earning their living through employment or entrepreneurship. Individuals in this stage are at a much higher risk for an unexpected life event that could have a catastrophic effect on their finances.
How much should you have in an emergency fund?
The rule of thumb for the amount you should set aside is typically right around 3 to 6 months of your expenses. These expenses need to account for not only your set recurring bills such as rent, utilities, debt payments, and insurance, but also your variable spending like food and transportation. If you’re married and have a dual income stream, or single and have some income from investments, you may be able to get by with just a three-month cash reserve. Individuals with a single income stream or single-income families should have six months of cash reserves at a minimum.
Additionally, you should also look at how consistent your income is. With sales jobs or any commission-based employment, monthly income can vary substantially. In this case, a larger emergency fund may be beneficial even if you have a second source of income.
What’s the easiest way to build and maintain an emergency fund?
Saving up for a fully funded emergency fund can be a daunting task for most individuals. Here are three tips that I’ve personally used in building my own fund:
Open a separate savings account.
Open a separate savings account either at your current bank or a separate financial institution. This adheres to the out-of-sight, out-of-mind principle. Once an emergency fund reserve is established, it should only be used for actual emergencies. Comingling these funds with existing savings can make it very difficult to mentally separate the use of the funds.
Make funding the emergency account an attainable goal.
Don’t try to scrape together the cash reserves faster than you are able to. Set smaller goals (monthly or annually) to help keep yourself disciplined in saving,
Establish automatic contributions to your emergency fund.
After establishing your personal budget, set an automatic transfer from your checking account each time you get paid.
Take action: Build your emergency fund and learn more about financial planning
Now that we covered the importance of having an emergency fund, what is stopping you? Take a moment out of your busy schedule to analyze your current financial situation. Are you as well prepared for life’s challenges as you think? If not, today is the perfect day to start building a cash reserve to prepare for the future. Reach out to a @Halbert Hargrove Wealth Advisor for guidance on budgeting, savings, and anything else that touches your financial life.
Disclaimer:
Halbert Hargrove Global Advisors, LLC (“HH”) is an SEC registered investment adviser located in Long Beach, California. Registration does not imply a certain level of skill or training. Additional information about HH, including our registration status, fees, and services can be found at www.halberthargrove.com. This blog is provided for informational purposes only and should not be construed as personalized investment advice. It should not be construed as a solicitation to offer personal securities transactions or provide personalized investment advice. The information provided does not constitute any legal, tax or accounting advice. We recommend that you seek the advice of a qualified attorney and accountant.
