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Emergency Fund: What is it and do I need one?

January 02, 2020
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Imagine a life without ever having to stress about money.  It’s all unicorns and rainbows as the kids say.  The sun is shining and it’s 75 degrees from your bank account’s perspective.  Well, that sounds a lot like San Diego, but either way, sounds nice right?

An emergency fund can take the stress out of a bad situation because you were prepared.  Preparation leads to success, but in this case, just less stress.

What is an emergency fund? 

An emergency fund is a set aside dollar amount for that unsuspected rainy-day maker; you hit a pot hole and blew a tire, hot water heater kicks, you hit the car in front of you because you were swiping right while driving, or worst of all you were just laid off. All terrible situations, but having money readily available makes things easier to handle.

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How much do I need?

In the financial planning world, you should have 3 to 6 months’ worth of living expenses set aside.  If you have a stable employment situation then having 3 months’ worth of living expenses in your emergency fund is adequate, while with an unstable employment situation 6 months’ worth is recommended. 

For example, an average older millennial couple in Hoboken, NJ might have $8,000 worth of monthly expenses between rent, cable, electric, transportation, insurance premiums, credit card payments (food/restaurants/bars/gifts/entertainment), loan payments, etc. 

 

                     

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This leads us to our next question, what if I don’t know how much my monthly expenses are?

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Create a spending plan

I’ll have a whole post on this at some point, but it’s necessary to touch on it here for the simple fact that knowing how much you spend on a monthly basis is NECESSARY.  Now I don’t mean just guessing how much you spend because you can add up how many pumpkin spiced lattes you drink a week plus your rent and cable bill.  I mean, really knowing your monthly expenses. 

For sake of this conversation, we are just worried about your monthly expenses, but it’s important to have a spending plan in place so you know what you’re actually spending your money on.  The goal is to take home more money than you spend each month. 

Rule of thumb:  Spend 50% on FIXED expenses such as rent/mortgage, insurance premiums, transportation, groceries, cell phone, utilities, student loan minimums.  Allocate 20% to savings (401k/IRA/retirement account or taxable brokerage account) and paying down debt (credit cards and student loans above the minimum).  Spend the remaining 30% on VARIABLE expenses such as going out to eat, cocktails, gifts, and entertainment.

We have a Client Portal at GWM that helps track this information by connecting to your bank account. It then categorizes your expenses so you can see exactly what you’re spending your hard-earned dollars on each month. Feel free to ask and I’d be happy to give you a personal log in to track your expenses and net worth.

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Where to keep my emergency fund?

Let’s keep this simple. The best place to keep your emergency fund is in a high-yield savings account. If you are going to keep cash, why not get paid to hold onto it? Your typical brick and mortar bank, such as Chase and TD Bank, are paying 0.1% while online banks are paying close to 2% to hold onto your money.  Bankrate has an article that that shows the highest rates in the industry right now. I currently use Wealthfront’s Cash Account and it works out fine for the purpose of an emergency fund. Whichever you choose, make sure it is FDIC insured.

Everyone needs to save for the unexpected. An emergency fund can be the difference between a stress-free incident or a foray into debt. Need help saving? Start small and build from there. Every dollar counts.

Let me know how I can help!

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Fun Fact: All even numbered streets in Manhattan run east, while all odd numbered streets run west.

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Disclaimer: This is meant to be general information and is in no way a recommendation for any investment product.