If you don't have an emergency fund, it's time to prioritize it

Written By: Laurie Allen, CFP® May 6, 2020

Over the years I’ve had the pleasure of working with lots of clients across the spectrum of age and wealth.  Early on in my career I would ask, “Do you have an emergency fund?” I’d remind them that it should be approximately 3 months of their expenses, wait for them to say,” yeah, we’ve got that”, and then move on to my discussion of investments and retirements savings.  Over the years and having been through the 2008-2009 financial crisis and now the COVID-19 pandemic, my experience has taught me that that having a fully-funded emergency fund is what gets us through times like these, not the fancy home we own or even our solid income.  It’s times like these that our incomes can suddenly disappear and having a solid emergency fund is the foundation for our overall financial health. 

Here are a few things I’ve learned along the way:

1.   Sometimes 3 months isn’t enough.  For a police officer or a tenured teacher, 3 months may be sufficient, but what about someone in a highly cyclical industry like construction or Real estate?  What about those whose income heavily relies on sales?  In this case, we need 6 months or even a little more depending on your responsibilities.

2.  We MUST make it a priority.  If you’re reading this now, and don’t have an emergency funds in place, STOP and make a plan.  Here’s a helpful resource to get you started.  Once times get good again, having this emergency fund will seem less appealing, so it’s important to remember the uncertainty you felt during this last economic downturn while you’re building it so you don’t lose steam while you’re building it. https://www.nerdwallet.com/blog/banking/savings/life-build-emergency-fund/

3.  Make sure to revisit your emergency fund annually.  As a recent grad an emergency fund of 6K might feel like plenty!  With no mortgage and no kids, there’s not as much to risk.  But what about when that same College grad 5 years later gets married, buys their first home and their income has doubled? That 6K wont go nearly as far.  Fast forward 5 more years and they have 2 kids and their income as tripled?  6K will likely get them through just a single month. If you’re working with a financial advisor, make a mental note to see if they regularly check back on this. At LA Wealth Management, this is an item we go back over with our clients annually.  Since our lives and income change so your emergency fund.

4. Don’t let yourself be tempted into putting your emergency fund into the stock market.  In Dec 2019 I had 3 separate calls from clients, asking what they could do with the money sitting in their saving earning very little. In 2019 the S&P500 earned 33.07%, while even high yield savings were barely at 2%.  My boring answer to those clients was, leave it alone! It’s there for emergencies and if you invest it in the stock market, it could dramatically drop just when you need it.