Welcome to Money Matters with FSA
Financial stability isn’t just about investments and retirement plans—it’s also about being prepared for the unexpected. I’m Mike Zarelli, CFP®, EA, and in this edition of Money Matters with FSA, we’re diving into one of the most important financial planning tools: your emergency fund.
An emergency fund is the financial buffer that keeps life’s surprises—car repairs, home maintenance, or unexpected medical expenses—from derailing your long-term goals. Let’s break down what it is, how much you should save, and why it’s an essential part of your financial plan.
What is an Emergency Fund?
An emergency fund is a liquid pool of cash set aside for unforeseen expenses. These are the financial curveballs that come out of nowhere—things like a sudden car breakdown, medical bills, or unexpected home repairs. Having a fully funded emergency fund allows you to cover these costs without tapping into credit cards, taking out loans, or selling investments at the wrong time.
Why It Matters:
- Protects your financial plan by keeping you from making panic-driven financial decisions.
- Reduces stress by providing peace of mind.
- Prevents debt by helping you avoid high-interest credit card balances when emergencies strike.
What Makes Up an Emergency Fund?
Your emergency fund should be easily accessible and stored in accounts with minimal risk. Here’s what to consider when setting up your liquidity bucket:
- Checking Account: Some people, like John Dutton (yes, from Yellowstone!), keep about one month’s worth of expenses in their regular checking account for quick access.
- High-Yield Savings Account: A high-yield savings account is a great place for the bulk of your emergency savings—it earns interest while remaining easily accessible.
- Brokerage Account: Some people may use cash reserves in their investment accounts for emergencies, but it’s important to keep this separate if you’re actively investing.
Pro Tip: Avoid keeping emergency savings in stocks or risky investments—you need stability and liquidity, not volatility.
How Much Should You Keep in an Emergency Fund?
A good rule of thumb is to have at least three months’ worth of expenses in an emergency fund. However, depending on your situation, you might need more.
General Guidelines:
- Three months of expenses: Works for dual-income households with stable jobs.
- Six months of expenses: Ideal for single-income families or those with variable income.
- Twelve months of expenses: Recommended for business owners or individuals in high-risk industries.
Case Study: John Dutton’s Emergency Fund
John spends $12,000 per month on living expenses, including his mortgage, food, and utilities.
- Three-month emergency fund goal: $36,000
- Current savings: $30,000
- Deficit: $6,000
John needs to increase his liquidity by $6,000 to meet his emergency fund target.
For business owners or sole income providers, a six-month fund might be more appropriate. That means John would need over $70,000 to be fully protected. His current $30,000 leaves a $40,000 shortfall, so a savings plan is necessary to build up that cash reserve.
Where to Keep Your Emergency Fund?
Once you determine how much to save, you need to decide where to keep it. Here’s a breakdown of the best places to store emergency savings:
Best Options for Liquidity & Growth:
- High-Yield Savings Account: Easy access with higher interest earnings than a regular savings account.
- Money Market Account: A safe alternative with slightly higher interest than a savings account.
- Short-Term CDs (if accessible without penalties): Only use this option if you’re comfortable with liquidity restrictions.
Where Not to Keep It:
- Stock Market – Too volatile for short-term needs.
- Real Estate – Not liquid enough for emergencies.
- Retirement Accounts (401k, IRA, etc.) – Early withdrawals can trigger penalties and taxes.
Final Takeaways: Why an Emergency Fund is Essential
An emergency fund is your financial safety net, allowing you to navigate life’s uncertainties without disrupting your long-term investment strategy.
Key Benefits:
- Prevents dipping into investments, keeping your wealth-building plan intact.
- Provides flexibility and control in uncertain times.
- Reduces financial anxiety by ensuring you are prepared.
If you don’t have an emergency fund yet, now is the time to start. Even setting aside a small amount each month can make a big difference over time.
Need Help Building a Stronger Financial Plan?
If you have questions about emergency savings, investment strategies, or financial planning, reach out to us. At FSA Wealth Partners, we specialize in creating customized financial plans that align with your unique needs.
Contact us at:
Email: [email protected]
Phone: (301) 949-7300
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See you in the next edition of Money Matters with FSA.
