Blog Post Financial Planning Wealth Management
November 16, 2023

Life is unpredictable. Financial stability can be the light that guides us through turbulent times. But where do we begin? One of the most crucial building blocks of financial stability isn’t an inheritance or a winning stock – things that can seem reserved for an elite and lucky few. It’s quite simply an emergency fund.

This financial safety net acts as a shield against unforeseen circumstances, helping to ensure you can weather the storms of unexpected expenses or income loss. The importance of this safeguard becomes even more evident when we consider shocking facts from Bankrate’s 2023 annual emergency savings report:

  • More than one in five Americans have no emergency savings. 1
  • 57 percent of U.S. adults are uncomfortable with the emergency savings they currently have. 1
  • One-third (33 percent) are “very uncomfortable” and 24 percent are “somewhat uncomfortable” with their level of emergency savings. 1

What’s more, building an emergency fund, brick-by-brick, paycheck-by-paycheck, is something anyone can do over time.

Let’s explore why having an emergency fund is essential, how much you should aim to set aside, where to keep it, and the circumstances in which it should be utilized.

Why You Need an Emergency Fund

You know the old adage – the only think certain in life is death and taxes. For the rest of it, we simply cannot predict when a financial challenge may arise. What we can do is plan for the unexpected. Whether it’s a sudden trip to the emergency room, a leaky roof, or the loss of a job, having an emergency fund is like a financial parachute that helps soften the landing. Rather than resorting to high-interest loans or running up credit card debt when unexpected bills arrive, an emergency fund can help you handle your immediate financial obligations while staying on track with your short and long-term financial goals.

How Much Should You Have in Your Emergency Fund

The ideal size of an emergency fund varies based on individual circumstances. However, a widely recommended guideline is to set aside 3 to 6 months’ worth of living expenses.2 This cushion is designed to cover not only unexpected bills but also to bridge temporary income gaps in case of job loss or other disruptions. By adhering to this guideline, you will have a solid financial buffer to rely on.

Try out this emergency fund calculator to get an estimate of how much you should set aside for your own emergency fund.

Where to Keep Your Emergency Fund

The key to an effective emergency fund is liquidity – meaning you can access the money quickly whenever you need it. In a normal interest rate environment, high-interest savings accounts or low-volatility investment accounts might be suitable. However, with today’s economic landscape, Money Market instruments have emerged as an attractive option. These instruments provide liquidity for immediate needs while also allowing your money to accrue interest, offering a balance between accessibility and growth for your emergency fund.

When to Use Your Emergency Fund

The definition of an emergency is subjective, and circumstances vary from person to person. Some may dip into their emergency fund to cover unexpected bills, while others might use it to seize unforeseen opportunities or as a substitute for taking on debt. In the unfortunate event of job loss, tapping into the emergency fund becomes a lifeline to replace lost income. As financial advisors, we understand the complexity of navigating both emotions and finances. However, one universal truth stands: whether they use it or not, nobody regrets having saved an emergency fund.

The Bottom Line

Life forces you to expect the unexpected. Think of your emergency fund as a weighted blanket, giving you comfort when life takes an unexpected turn. Remember, financial peace of mind is not a luxury. It’s a necessity, and an emergency fund is the key to unlocking it. If you find yourself facing the stark reality of inadequate emergency savings, we’re here to help. The advisors at Prime Capital Investment Advisors are dedicated to guiding clients through the process of creating a robust financial safety net. Don’t let these statistics define your financial journey—call a PCIA advisor today at 800.493.6226 and take the first step towards securing your financial future.

 

Footnotes

1 https://www.bankrate.com/banking/savings/emergency-savings-report/

2 https://www.nerdwallet.com/article/banking/emergency-fund-calculator

Ashlea Jones
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Ashlea has served private clients at every point in their savings timeline. From entry-level investing for those beginning their first careers, to retirees looking for ways to make the most of the money they’ve worked so hard to earn, Ashlea has been there to help them achieve their goals. She enjoys playing the dual roles of coach and teammate in the advising process and strives to make each client’s service unique to their best interests. She brings openness, honesty and enthusiasm to the clients she has the pleasure of connecting with. Prime Capital Investment Advisors presents Ashlea and her clients flexibility and autonomy while also prioritizing transparency around the fees and essential services we offer.