In this week’s Mullooly Asset Management podcast, Tom and Brendan discuss a question they hear a lot. The question is, “How much money should be in my emergency fund?”. Tom was inspired to talk about financial safety nets this week because of a New York Times article that Barry Ritholtz suggested checking out. The article contains a savings calculator, and you can check that out here. Many people today are operating without any sort of financial safety net or emergency fund, and this is a big mistake.
Everybody has been through a rough patch financially before. Tom stresses the point that you can be one step closer to avoiding financial troubles if you build a bigger emergency fund. Whether you want to refer to it as a rainy day fund, financial safety net, or emergency fund the point is that you need one. If you don’t have one, you might want to delay that big purchase or vacation for six months to a year. Tom reminds everybody that it wasn’t raining when Noah built the ark. Don’t wait for disaster to strike, be proactive. When you have some money in the bank to reassure you, it can really change your perspective on life.
Now that the point of having an emergency fund has been stressed, we’ll get to the question of, “How much money should be in my emergency fund?”. Tom suggests that everybody have a minimum of three months expenses in their financial safety net. This means that before you invest any money or make any large purchases, this money should be saved. Some people have expressed that they feel more comfortable with six months of expenses saved. If you want to save a year’s worth of expenses in your emergency fund that’s okay too! The only thing that is not okay is not having an emergency fund.
So really the answer to the question, “How much money should be in my emergency fund?”, is at least three months of expenses. Anything more than that is great. Anything less than that is risky and not recommended. Learn more about emergency funds in this week’s Mullooly Asset Management podcast.