What is an Emergency Fund?

What is an Emergency Fund?

We have all had that unexpected event that happens just as we get back to square one. It’s never expected and it’s never welcome! The fact of the matter is that life continuously throws curve balls at us, and unfortunately those curves usually cost money that we did not expect. The solution? We have to plan for the unexpected.

Rule of thumb is to build an emergency fund of 3-6 months living expenses. Living expenses are different than salary. What you are trying to protect against is the unexpected cost that can pop up in day-to-day life, like a new hot water unit, 4 new car tires, a medical emergency, or just a bit of bad luck.

The amount of living expenses you should keep on hand is also dependent on the security of your job. If you are a freelancer or a gig worker, how secure do you feel? Is your income steady or are their potential gaps in cash flow from month to month? If you are not sure, it might behoove you to increase your emergency fund to 6 months, or even more. If you are a government employee and you feel very secure in your job, perhaps only 3 months of an emergency fund is what you need to be comfortable.

So why not just have an emergency fund of a year or two? Well, the more money you keep in liquid cash in a savings account, the more opportunity cost you will incur by not investing. It’s good to have security, but also important to grow your net worth over time through investing responsibly. The more money that sits under your mattress or in the bank, the more inflation will begin to rob your purchasing power over time. Make sure you are comfortable with your emergency fund before investing.
Remember to consult a financial professional for further information on this topic. #wealthtipwednesday #emergencyfund #investing

-Your friends at Red Oak Financial Group