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How Much of an Emergency Fund Should an Investor Have?

How Much of an Emergency Fund Should an Investor Have?

| April 18, 2023

An investor should have a liquid emergency fund that covers three to six months of expenses. You can work with a financial services consulting expert to determine the exact amount that's right for you. This money should be immediately accessible in a high-yield savings account or money market account. Your emergency fund is something you want to save before you start investing.

How To Determine Your Emergency Fund Savings Goal

Start by taking a close look at your necessary monthly expenses. These include your housing costs, utilities, food, debt payments, and health care costs. If you suddenly lost your income, you would probably cut down on things like entertainment. These expenses don't need to be included in your base costs.

Now you need to consider your ability to save and the likelihood of a major emergency expense. If you work in an industry where layoffs are common or your income is unsteady you need a higher goal. Working with a financial consultant on a cash flow analysis may help you determine your risk level. Then, you can set a goal you feel comfortable with, aiming for between three to six months of expenses.

Why You Don't Want To Invest Your Emergency Fund

In an emergency situation, you need to pull money out of your account immediately. You can do this from a high-yield savings account without penalties. If you withdraw funds from a 401K or IRA before you reach retirement age there is a 10% penalty. Depending on the account type, you may also lose money on taxes.

Also, keep in mind that your investments in the stock market go up and down daily. If you are forced to withdraw money on a moment's notice, you won't be able to strategically withdraw when your funds are high. You may lose on your investments instead of earning. Ultimately, pulling money from a savings account is done penalty free, but pulling from investments costs you.

What To Do With Your Emergency Fund

A high-yield savings account will have a higher interest rate than a regular savings account and is a solid option. Similarly, money market accounts will allow you to withdraw at a moment's notice and sometimes have debit cards attached. Note that a money market account typically has a minimum deposit to get started. You can find high-yield savings accounts with a $100 minimum or no minimum at all.

Some people consider using certificates of deposit (CD) for their emergency fund. These accounts typically have a timed agreement of one month to five years. Because your emergency fund should be immediately available, a CD is a risky place for all of your emergency funds. For a great rate, putting half of a six-month emergency fund in a short-term CD can work.

Financial Services Consulting Experts Can Help You Strategize

An emergency fund is one of the first major savings goals everyone should have. It requires a lot of decisions and setup, like knowing your budget and understanding your risk tolerance. It requires you to understand the kinds of financial emergencies you are most likely to face.

A financial consultant can help you manage your personal finances. Services like a cash flow analysis help you understand your budget and the realities of your personal emergency fund requirements. They can also review your best options for where to put your emergency fund and discuss your long-term investment goals. Keep in mind that as your expenses change over time you may need to add more to your emergency fund.

Investing is a great way to build wealth and secure your future. Before you get started, you'll need to become confident about your budget and your emergency fund. This is part of planning for your long-term financial future. Contact Jaks Financial for help with your financial planning strategies.