Emergency Fund: Concerns about Unexpected Expenses

Concerns about money are one of the most common stresses of life. It can keep you up at night and cause stress to your health and relationships. Of course, one of the top concerns for all of us is knowing we can handle unexpected expenses. 

As a financial advisor, one of my goals was to help people build a solid financial foundation. While advising, I encouraged clients to get out of debt (mortgage excluded) and establish an emergency saving reserve before starting to invest. Everyone experiences surprises in life. Home or car repairs may be more expensive than the amount you have budgeted. Medical bills can far exceed what insurance may cover. The recent pandemic has shown us that you may experience a prolonged period of unemployment. We all need to have some money in reserve to protect against such possibilities. 

An emergency fund should be enough to cover three to six months’ worth of essential living expenses, as a general rule. Which end of the range is right for you? It depends, in part, on how many breakable moving parts you have in your life. Home-owners need more in reserve than renters. People with health issues may need to have more set aside than others, depending on their health insurance coverage. Those with less than stable jobs or income situations should probably have more savings than those whose incomes are relatively more secure. Single-earner households probably need more savings than dual-earner households.

Your emergency fund isn’t for getting new tires or an annual heating system check-up. Those items should be covered by budgeting a certain amount each month for vehicle and home maintenance repairs. Instead, an emergency fund is for bigger-ticket expenses, such as a major repair that you had no way of anticipating. And as mentioned earlier, the most significant financial emergency for most people would be a sudden loss of income.

It is best to keep your emergency savings where it can earn at least a little interest while remaining easily accessible. This isn’t stock-market or real-estate money. You can certainly use your local bank and search for online banks that may offer a little better interest rate. Make sure the institution is FDIC insured and your funds are always immediately available to you.

Building savings will never score very high on the excitement meter. However, having a well-stocked emergency fund will contribute mightily to your peace of mind as you pursue your investment goals. So, build savings first, and then invest.