Planning Your Emergency Cash Fund
Setting money aside for emergencies is important, but be sure to take these factors into account
If you don't have an emergency cash fund, you may not be as financially sound as you think you are. If you have one, here are some things to think about as you plan to set aside money to help you through unexpected misfortune.
Why should you have an emergency fund?
You never know when your financial situation may change. Even if you're in good shape now, life may deal you a major blow, and having an emergency fund can help you be prepared to deal with it and recover more quickly. You could lose a job or a business, or be hit with unexpected medical bills or damage from a natural disaster that your insurance won't fully cover.
How much do you need to keep in your emergency fund?
There's no set amount for what you should have in your emergency fund, but obviously the more you save, the more effective it's going to be in helping you out when you need it. There are a variety of factors to consider, including how much you would need to cover necessary expenses if you were to suddenly lose your income. Think about your mortgage, your car payment, groceries, utilities, etc.
According to Vanguard1, most experts think you should have at least enough money to cover three to six months’ worth of expenses in your emergency fund, but this may not be realistic for everybody. Start with what you can, and add to it.
Where you should you keep your emergency fund?
Not everybody agrees on the best place to keep your emergency fund. Discover2 suggests a high-yield savings account, a money market account, certificates of deposit (CDs), or a Roth IRA.
"A high-yield savings account might be the best place to keep your emergency fund," it’s website says. "Not only are your funds accessible in this type of bank account, but you’ll also earn interest on your deposits."
How frequently should you add to your emergency fund?
The easy answer is: whenever you can. It stands to reason that the more frequently you add to it, the more you'll be able to save, and the more quickly you'll be able to reach your ultimate savings goal, whether that's three to six months' worth of expenses, or more.
Realistically, most people don't add to their emergency fund at the most optimal rate. After all, the more you stash, the less you'll have for day-to-day spending. Take a look at your lifestyle and assess which expenses you truly value and which you'd rather do without in the name of financial security. Then set up a schedule that works for you, whether it’s having money automatically deposited into savings from each paycheck, or setting up regularly scheduled fund transfers from checking to savings through online banking.
Are there any drawbacks to your emergency fund stashing?
As long as you're saving money, you're doing the right thing to some extent, but here are some considerations you should take into account:
Arielle O'Shea at NerdWallet makes the following point: "Stashing too much money at low interest rates can mean actually losing money to inflation over time. The other drawback is that you may be over-contributing to that emergency fund and neglecting tax-advantaged retirement account options like a 401(k) or IRA. There is a big opportunity cost here, because that extra money is missing out on investment earnings. At 2% interest, you’ll get $400 a year on a $20,000 balance. If invested instead, the earnings could be three or four times that."3
A key takeaway here is you might want to consider not putting all of your extra money in one emergency fund basket. If you can’t decide which option is best for you, make an appointment to discuss your savings plans with your banker.
The information provided is presented for general informational purposes only and does not constitute tax, legal or business advice. Any views expressed in this article may not necessarily be those of Nevada State Bank, a division of Zions Bancorporation, N.A. Member FDIC