Fund. Personally the emergency fund is one of the greatest financial tools in freeing me from stress and worry. Having a set amount of easily accessible cash set aside that remains untouched, barring an emergency, allows me to not have to worry about unexpected repair bills, layoffs, etc.
It is also something I believe I have almost always had because of the feast and famine nature of the entertainment business. Especially being on the road, the summers tend to be a dead time for work, so very early in my career I realized I needed to save money to help cover these dead times as I did not want to work jobs outside my career to cover my expenses. So, long before I knew the term emergency fund, I definitely had one. Recently though I have been thinking a lot about my emergency fund and how much I should have in it.
The common wisdom I hear for an emergency fund is to have 3-6 months of expenses set aside, which you would know from the tracking you have hopefully been doing. This part is fun for me because while I track my expenses as shown in earlier articles, those expenses are while employed on the road, staying in hotels/airbnbs every week, eating most meals at restaurants, etc. These are not things that would be happening if I was laid off and having to depend on my fund. So, I borrow other peoples numbers and truthfully think I have about a years worth of expenses currently.
I do admit though I cheat with my emergency fund. Instead of having it as a set aside fund that I don’t touch except in cases of emergency, I also use it to store extra cash that I plan on using for the purchasing of investment properties, so when I find a property to purchase I will probably be at 3-6 months expenses with the remaining cash. This is definitely a do as I say and not as I do scenario as I do not advise most people to mix their funds.
The reason I do this is I keep my emergency fund in an online savings account, and recommend most people do the same. This is because online savings accounts usually have the highest interest rates you can find. The one I use, American Express Personal Savings, has a current APY of 2.1% while my brick and mortar bank is giving me an APY of .75% in my savings account. While that 1.35% doesn’t sound like a huge difference, if you had $15K in each account and left it for 10 years, the online account ending value would be $18,464 whereas the brick and mortar would only be $16,163. It being online also makes it a tad bit easier not to touch, though the money is still easily accessible.
As I mentioned at the beginning of this article I have been thinking a lot about my emergency fund and if I should change the amount of money I am saving. I have been catching up on the ChooseFI podcast and they have had a couple of episodes and guests recently that demonstrated different views of the fund. Some guests have had a year’s worth of expenses set aside, and while it may not mathematically be the most beneficial, it helps them sleep at night which is the point of this whole movement. Others have only $5,000-$10,000 in cash and invest the rest, though usually these people also have a home equity line of credit (HELOC) open or credit cards to help back up any major expenses that may occur. For myself personally I have been debating lowering the amount in my emergency fund as I have my taxable investment account that if needed I could sell some stocks and transfer the money to my bank in a matter of days.
I definitely think if you are just starting out on the savings journey that you should aim for accumulating 3-6 months in cash before looking into investing. This is why I am covering the emergency fund before covering investing. I know for myself personally it would be demoralizing to have to sell investments if I was just starting out to cover an unexpected expense, rather than having the money set aside and then working on building it back up.
*Image by Thomas Breher from Pixabay
