Can you guess one of the secrets of financial success?
Most financial planners will tell you it’s building an emergency fund! Having money set aside for unexpected expenses is key to financial security. I’m talking about big-ticket things, like major car or home repairs or a trip to the emergency room.
Now, the bad news: many people say they don’t have enough saved to cover a $1,000 expense. Scary, right?
Let’s imagine the OPPOSITE scenario. Could you have too much money in emergency savings? That sounds like a great problem to have!
But there’s a limit to a “reasonable” amount to keep in the bank. Interest rates are low. Putting all your cash in a typical savings bank account means you’ll miss out on earnings. Plus, the buying power of your hard-earned money will shrink as prices for everything — from milk and eggs to gas for your car — rise over time.
How much cash is too much?
Here’s the thing: not even the experts can agree on that.
- The rule of thumb is to keep three to six months’ worth of living expenses in an emergency account.
- Some financial planners suggest keeping up to eight months’ worth of expenses in your emergency fund. Wondering why eight? That’s how long an average person’s job search takes.
Your optimal number may be different from what experts recommend because of your history, circumstances, and the types of “sudden” expenses that can happen in your life.
So, here’s another way to look at emergency savings. Begin by defining the worst-case scenario that would drive your need for emergency cash.
- What would happen if the family breadwinner lost their job? Or, for a dual-earner family, what if
BOTH partners were suddenly laid off?
- How much would you need in the event of a natural disaster? Even with quality insurance, you’d still have a lot of out-of-pocket costs to cover.
- What’s the annual deductible associated with your health insurance policy? Car insurance policy?
Understanding your own emergency cash needs may be more important that finding “the best formula for emergency savings” online! Anything above that number should be funneled to other goals, like saving for retirement, college funding, HSA accounts, etc.
Where to stash your cash
First things first: your emergency funds must be easy for you to access at any time.
Avoid putting it in any account that could lose value, like stocks or a mutual fund. Guaranteed investment
Certificates (GiCs) may not be the best choice either, because they limit your ability to take the money out.
Remember that your bank savings accounts are insured for up to $100,000. You won’t lose that money if the bank fails. Look at money market accounts if you want to make a bit more in interest. However, don’t chase returns. The purpose of this money is to serve as a safety net.
And whatever you do, don’t stash it all under your mattress! Cash is impossible to trace. If you happen to
misplace it (or if someone steals it, or if your house burns down), it’s gone for good.
Decide on an amount you are comfortable with keeping around the house. For example, you might do the math on how much it would cost you to get your family to safety and keep them housed and fed for 3-5 days in the event of a natural disaster. Keep that amount in a secure spot in the house — and take the rest to the bank.
How do you approach your emergency savings? Is it working for you? If not, our team at MDL Financial has some ideas. Drop us a line and let’s talk.