Search
Why you should have an emergency fund?
Life can change quickly, whether it’s a job loss, a market downturn, or an unplanned major expense—these changes are sometimes unavoidable. Having an emergency fund is essential for avoiding high-interest debt, having to deplete your home equity, or having to sell long-term assets during economic downturns.
Now, more than ever, setting aside a formal emergency fund for unexpected expenses and/or a reduction in income is crucial. Without one, you risk financial instability and increased debt. Plan ahead to maintain your financial stability and peace of mind.
Key takeaways
1. Every investor should strive to put aside enough cash to cover at least six months of living expenses in the event of an unexpected income disruption or major unplanned expense.
2. This financial safety net will not only afford you peace of mind in being prepared to weather short-term storms, but it will also protect you from having to liquidate long-term investments at potential fire-sale prices.
3. Building your emergency fund doesn’t have to be difficult. There are a variety of ways to achieve your goal without mortgaging your future.
Creating your safety net
Building a safety net is an essential step toward financial security, offering peace of mind during unforeseen circumstances. To start, allocate a portion of your income each month to a dedicated emergency account. Additionally, channel any extra funds, like tax refunds or bonuses, into this account to help it grow faster without impacting your regular budget.
If you have a whole life or universal life insurance policy, you might consider using its cash value in emergencies. This value grows tax deferred and can be accessed without repayment, though it may reduce your policy's death benefit. For immediate needs, a home equity line of credit could be a solution, but it should be reserved for true financial emergencies.
How much should an emergency fund be?
Your emergency fund should ideally cover at least six months of living expenses. For those in less stable industries, a 12-month cushion is more advisable. This ensures that you have a reliable buffer to manage unexpected financial challenges.
Where to put your emergency fund
Place your emergency fund in a liquid, easily accessible account such as a checking, savings, or money market account. These options allow you to quickly access your money when needed.
Should you invest your emergency fund?
It’s best to keep your emergency fund in a safe, stable place rather than investing it. Investments can fluctuate with the market, and the primary goal of an emergency fund is to provide security and immediate access, not to grow through potential risks.
How to build an emergency fund
Creating an emergency fund is a fundamental step in securing your financial future. Here are practical steps to help you start building your safety net:
1. Set clear goals
Determine the amount you need to save to cover at least six months of living expenses, adjusting for your specific situation.
2. Assess your finances
Review your income and expenses to identify how much you can reasonably set aside each month for your emergency fund.
3. Automate savings
Set up automatic transfers from your checking account to your emergency savings account to ensure consistent contributions.
4. Utilize windfalls
Deposit any extra income, such as tax refunds or bonuses, directly into your emergency fund to help it grow faster.
5. Reduce unnecessary spending
Identify and cut back on nonessential expenses to free up more money for your emergency savings.
6. Track your progress
Regularly review your savings and adjust your contributions as needed to stay on track with your goals.
7. Don’t wait until it’s too late
Preparing for emergencies is an essential part of personal finance. Setting aside funds for unexpected needs helps you manage short-term economic challenges while keeping your long-term goals on track.
RELATED CONTENT
Have specific questions?
Want additional information on building your emergency fund? Talk to an Eagle Strategies Financial Advisor.
Eagle Strategies LLC (Eagle) is an SEC-registered investment adviser. Registration with the SEC does not imply a certain level of skill or training. Eagle investment adviser representatives (IARs) act solely in their capacity as insurance agents of New York Life, its affiliates, or other unaffiliated insurance carriers when recommending insurance products, and as registered representatives when recommending securities through NYLIFE Securities LLC (member FINRA/SIPC), an affiliated registered broker-dealer and licensed insurance agency. Eagle Strategies LLC and NYLIFE Securities LLC are New York Life companies. Investment products are not guaranteed and may lose value. No tax or legal advice is provided by Eagle, its IARs, or its affiliates.