What’s the Right Amount for an Emergency Fund?
How much money should you have in your emergency fund? Or, as we refer to this at David Adams Wealth Group, your bucket #1. There is no right or wrong answer to this question. Often, you may hear the right amount is 3 months of expenses or 6 months of expenses. But the truth is, sometimes there is just a number that feels good. Whether that number is $20,000, $50,000, or even $100,000. The right amount is the amount that helps provide you reassurance. The purpose of your bucket #1 isn’t to make money. The purpose of your bucket #1 is to help make sure you are protected and able to cover your monthly expenses and any emergency expenses that may pop up.
We often joke in meetings, tell us how long you are going to live, and we will build you the perfect financial plan. We could make a similar joke with the emergency fund. Tell us when the HVAC is going to go out, when you are going to need new tires, or when an unexpected medical issue will come up and we will tell you just how much money should be in your bucket #1. Although an emergency fund may seem boring compared to other investments accounts, when one of these unexpected events occurs you will be happy you were disciplined enough to have a stable bucket #1.
Next to building up your bucket #1, the second most important concept behind bucket #1 is understanding the purpose that it serves and what it does not serve. The main purpose of bucket #1 is to cover everyday living expenses, as well as, the unexpected life events, like I mentioned earlier. It’s important to understand this so that you are not out spending this money on discretionary expenses that could leave you in a tight spot should you need access to the funds in the emergency fund. Having the discipline to both establish a bucket #1 and maintain it are the foundation to a successful financial plan. This isn’t to say that you cannot spend some of your hard-earned money on “fun stuff”, it’s about understanding the balance and comfort that a proper emergency fund can help create in your life.
When you have a proper bucket #1 established, it can help to alleviate stresses that can be tied to money. The unexpected expenses that pop up are no fun. But knowing you can face them head on, rather than wondering how you are going to come up with the money will help your financial future. Not only can a proper bucket #1 help create financial independence, it can help to create confidence that is necessary for an overall healthy life.
By: Myles Zueger, Senior Relationship Manager
Any opinions are those of the author and not necessarily those of Raymond James. This material is being provided for information purposes only and is not a complete description, nor is it a recommendation. Investing involves risk. Keep in mind that there is no assurance that any strategy will ultimately be successful or profitable nor protect against loss.