Your Emergency Fund: How Much is Enough?

Written by Chris Draughon

I want to see you achieve your financial goals so I spend my time making the complicated things simple. As the Director of Financial Planning I help our clients identify their most important financial goals and develop paths to get them there on time with room to spare.

March 18, 2015


Your Emergency Fund: How Much is Enough?-media-1

An emergency fund provides a financial cushion should you lose your job or have an immediate need for a lot of cash. However, it’s hard to determine “how much” you’ll need or where this money should be kept.

There isn’t one correct answer to this question, because it depends on your individual goals. Start thinking about what you’re comfortable with, research banking or investing options that match your goals, and develop a plan that meets your specific needs.

Identifying Goals

An emergency fund should not be a specific dollar amount, but rather equivalent to the time you’d need to get back on track after a financial setback. Many experts recommend having three to six months’ salary saved, but that may not be enough. In an April 2014 report, the U.S. Department of Labor reported 38% of unemployed Americans were out of work for at least 27 weeks.

Figuring out your savings goal is about what you are comfortable with. Is your job stable? How quickly could you find other work? Your savings should allow you to rest easy at night.

Account Options

There are several options for emergency fund savings, some with more withdrawal flexibility than others. Depending on your savings goals you may choose to have more than one type of account.

  • Savings or money market accounts – little gains, but easy to access your money.

  • Short-term CDs – slightly higher gains than savings accounts, but laddering maturities may not be worth the effort.

  • Fixed-income investments with short maturities – these have a higher risk, but the greatest potential for higher returns. They are also the most difficult to access if ever needed, and remember that investments are not insured by the FDIC may involve the risk of loss and past performance is not indicative of future returns..

Regardless of which options you choose, revisit your accounts annually to stay on track. Changes in your work, health or family can all impact your goals and how money is being saved.

Additional Options

If you have a minor financial emergency and don’t want to dip into your savings, you have some options as well.

  • Roth IRA withdrawal – you can make a penalty-free withdrawal on contributions, but not gains. If you do this, you will need to file the IRS form 8606, but you won’t be hit with any additional taxes.

  • 401(k) loan – this is a costly option because of interest repayment, and the loan may also become taxable if you lose your job before paying it back.

  • Line of credit – opening a line of credit provide access to additional funds, although it also creates another debt for you.

What’s Your Goal?

Now that you know your options, think about what you’re comfortable with and what will help your financial goals. The financial advisors at First Coast Wealth Advisors will be happy to help select a strategy that works best for you. Give us a call today for your financial check-up.