The Importance of an Emergency Fund: Highlighted by the Coronavirus Pandemic

An emergency fund account is a liquid savings account that should only be used in times of extreme hardship or unexpected expenses. We often recommend that individuals have an account with at least 3-6 months' worth of expenses depending on employment. The exact value of your emergency fund can be dependent on several factors. One person's need for liquidity can be much greater than that of someone else.

When recommending a monetary emergency fund goal for our clients, there are certain things that need to be considered. The most important considerations include years to retirement, consistency of income (commissions-based vs salary), dual incomes and job security. Usually those closer to retirement will have a greater need for liquidity in times of hardships, as will many commission-based employees. Therefore, people in those riskier categories would likely benefit from an emergency fund account with closer to six months' worth of expenses. People with more secure income or dual working spouses can be closer to 3 months' worth of expenses in an account. The trick is finding a balance between having a funded liquid account while not losing out in the potential gains that money could have in the market.

The Coronavirus pandemic has highlighted many issues in personal finance. With potentially millions of people losing their jobs and entire businesses facing hardships that could lead to permanent shutdowns, we find ourselves wondering how people might be able to survive financially. For many people, having that 3-6 month cushion in emergency funds will be saving them their home, vehicles, etc. Though there are a few avenues people can use to help them (unemployment and stimulus checks), there's no telling how long these shutdowns will last and if those avenues won't dry up before this is over. Therefore, ensure you are funding your emergency account as much as you can now, by potentially decreasing current spending or using the stimulus check so that you are covered in the future.

Written By:
Tiffany Austin