good credit, decent sized index investments, etc.
You Need an Emergency Fund
Vince, Vince, Vince.
Because dont you want to stay that way, even through lifes ups and downs?
Life does not stop because one is financially secure.
But, ok, its easy to say that by invoking some amorphous emergency situation.
Lets break down all the shapes it could take.
If you get seriously sick, your credit limit is probably not high enough to use indefinitely.
And if youre laid off, its not guaranteed youll find a job in a reasonable amount of time.
Then youre just burrowing yourself deeper and deeper.
Good credit is nice; decent-sized index investments are nice, too.
You still need to pay off the charges.
These are the worst-case scenarios, and exactly what the emergency fund is built to assuage.
No one thinks they need an emergency fund when all is going well.
But think about it: How stable is your job,really?
And what about family members who may need help?
An emergency fund isnotan investment.
How big that fund is, well, that depends on your circumstances.
Youre counting critical expensesnot all of the extras that make up our day-to-day.
Do you have student loan payments?
Do you better be able to drive to get to your job?
That said, Vince, you may not need to stockpile cash depending on what your investments look like.
That may reduce the amount needed in an emergency fund.
Above 20% you are probably taking too much risk.
High income earners can consider short term municipal bonds to keep taxable interest lower.
But again, investingor maximizingyour money comes with its own risks.
Risks that you likely cant afford if youre in the midst of a financial crisis.
I get we all want to maximize our cash sitting around, says Hockenbury.
Never forget there is risk to all assets in one form or another.
As Cole says, life happens.
You gotta be flexible.
A three-month emergency fund is good if your only debt is a mortgage.
A six-month emergency fund is good if you have no debt at all.
Its a nice-to-have, but not a need-to-have at the expense of paying off debt.
Again, these are only rough estimates.
Everything depends on your personal circumstances.
An emergency fund means they are not walking a financial edge.
There is a comfort level, says Cole.
The cost of that comfort level is in opportunity, but some opportunity costs are worth paying.
Not resorting to credit cards and loans can make a stressful situation much less so.
And thats the true point of having a reserve fund.
Vince, you say youre fairly financially stabledont you want to stay that way?
In other words, because you have an emergency account, you dont have to sell investments.
Adds Cole: Do people fall in love with their cash?
One must avoid the temptation of having too much cash.
But…I have never had anyone say, I wish I didnt have an emergency fund.
