Can Your Emergency Fund Withstand… An Emergency?

It feels as though we experience a “once-in-a-century” event that leads us to a “new normal” every decade. And those in the media love to proclaim, every time, that “this time is different.” Now, we’re hearing it again: the COVID-19 pandemic changed everything. After experiencing yet another life-changing event, we’re going to look at one financial concept that remains unchanged and especially important during uncertain times: the emergency fund.

An Emergency Fund During Difficult Times

While the rules haven’t completely changed, the pandemic did reveal how unprepared people were for a real emergency. The U.S. Census Bureau released data in June 2020 indicating that an overwhelming majority of households used the first stimulus check last spring to pay for food, rent, or utilities. Having an emergency fund is no more important now than it was pre-pandemic, but the economic woes brought on by the pandemic have reminded people of the value of a rainy day fund. According to a survey conducted by Personal Capital in the spring of 2021, 51% of Americans now see having an emergency fund as a higher financial priority than it was before the pandemic.

As the pandemic (or the Great Recession, or the dot-com bubble, or any other “New Normal” event) has shown us, it is critical to have emergency savings set aside. Conventional wisdom suggests that emergency savings should meet somewhere between three and six months of your living expenses. However, this advice varies widely depending on who you talk to and where you are in your life. Kendall Little of NextAdvisor writes, “The purpose of an emergency fund is to help get you through difficult times, so it needs to be big enough to cover your basic expenses for a set period of time. Just how long depends on your job security, your risk tolerance, your age, and other factors.”

How Big Should My Emergency Fund Be?

As with most financial questions, the answer to, “How big should my emergency fund be?” is likely to be “It depends!”, followed by more questions. First and foremost, it is essential to consider what constitutes an emergency. Lindsay Bryan-Podvin, author of The Financial Anxiety Solution, recommends identifying potential situations and creating policies for what events would warrant dipping into your emergency savings. “She says most people don’t consider how they’ll use their emergency savings until they’ve already started,” writes Lisa Rowan of Forbes Advisor. By defining the scenarios in which these funds might need to be accessed, you remove one of the roadblocks preventing you from building up these emergency reserves.

Additional questions that should be considered include:

• How hard would it be to replace your income if you lost your job?
• What other sources of support do you have?
• Are there two sources of income in your household or just one?
• Would you want to support anyone outside of your household (for instance, an aging parent)?
• Which expenses are necessary for you and your family to survive, and which expenses can be cut out in a time of crisis?

Addressing these questions can help you identify how you might change your lifestyle if the need arose, giving you a sense of how large your emergency fund needs to be. And, Rowan adds, clarifying the goal for your savings has been shown to increase the motivation to save.

As an example, age and job security play major roles in shaping your emergency fund. Early on in your career, you can afford to be lean. Millennials and Gen Z are often considered “The Job-Hopping Generation,” and this experience can work in your favor. Job loss is often considered the single most important purpose of an emergency fund (though it is certainly not the only one), and for young workers who are used to job hopping, job loss could just as easily be considered an opportunity as a threat. Your age is your superpower, so down time between jobs is not nearly as harmful in the early stages of your career.

By contrast, Brian Preston, CPA, CFP^®, PFS (The Money Guy) has said, “As you get older, and as more responsibilities are pulling upon your wallet, you want to make sure you have the margin to be safe.” As you mature, and as your life gains complexity, you may not be able to return to the “broke college student” diet of ramen and white rice during an emergency. When your income provides for more than just yourself, you need to think about more than just yourself when deciding which expenses you can cut out in case of an emergency.

In the end, the greatest consideration when establishing an emergency fund is what will give you peace of mind. As Christy Bieber writes for The Motley Fool, “If you still find yourself lying awake wondering how you’d pay your expenses if you lost your job or how you’d cover medical costs if you or your spouse got sick, then you need to bulk up your emergency account balance.” While much is made about optimizing your resources and identifying precisely how large your emergency fund should be, the #1 goal of an emergency fund is to give you the confidence that you can remain financially stable if something were to happen.

So, does your emergency fund meet your needs? At Yeske Buie, we recognize that this answer is different for everyone. This is why an integral part of our financial planning process is to dive deep into discovery, in the hopes that every recommendation – including those regarding your emergency fund – is tailored to your specific situation. If you have any questions, or if you’re wondering whether your emergency savings plan could use a refresh, please don’t hesitate to reach out. As we like to say, we’re good people to think with^®.