Emergency Fund – What It Is and Why You Need It

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Emergency Fund In several past newsletters we have mentioned the idea of an emergency fund. For high net worth individuals (those with more than $500,000 of investible assets), the question might be how that fits into the rest of their portfolio. The general rule of thumb is that you should have 3 to 6 months of savings set aside to tide you over in case of an unexpected cessation of your income. This could be from a job loss, illness or disability, or even the need to care for a parent if you are a part of the growing “sandwich” generation.

Let’s start with the reasons for having an emergency fund, and look at the differences between those starting out and those who are nearing or even in retirement. This year, for the first time in a long time, saving more and spending less are at the top of the list as far as New Year resolutions are concerned. Many people live paycheck to paycheck, and in constant fear that something bad will happen. Obviously, they would feel much safer if they had that 3 to 6 month cushion to fall back on. In today’s economy, it would make sense to strive for the longer of those. Even with unemployment benefits, there is often a shortfall after a job loss, and having that bucket of money set aside provides at least some sense of confidence. For those, it may make sense to have the funds in a low yielding but safe and liquid account like a money market or bank savings account. They don’t earn much, but are accessible when needed.

But what if you have a significant portfolio? Many people still feel the need to have that emergency fund sitting in the same low return accounts. We may be talking about sums in excess of $50,000. Is there a better way? If you have worked to have a well-diversified portfolio of both equities and fixed income investments, and incorporated a laddered fixed income strategy, ready access to needed cash is relatively easy. At Rodgers & Associates, we often recommend having the fixed income portion of your portfolio laddered over a 5 year time frame with money coming due every 3 to 6 months. This money is generally invested in a series of 1 to 5 year investment grade bonds that allow, in most cases, a better yield than money market or savings accounts. These bonds could be corporate bonds, municipal bonds, government bonds or FDIC insured Certificates of Deposit.

Beyond that, whenever the need for cash arises, significant thought needs to go into where you want to pull it from. Having your assets well diversified usually means some will be doing well while others may be underperforming. Perhaps you have equities that have either capital gains or losses that need to be considered. You don’t want to sell a competitive investment in a down cycle if it is performing well against its peer group, but you may want to sell one that is underperforming its peers in order to take a tax loss. Choosing between taxable, tax deferred, or tax free sources is another source of confusion, and is directly related to an individual’s personal tax situation. Moving money entails so much more than many people are willing to spend enough time on and mistakes are often made that can really cost you in the long run.

Rick’s Insights

  • Make sure your investment portfolio is well diversified, both among asset classes and tax treatments to increase your options for access.
  • Don’t keep all of your emergency funds in a low yielding account like a money market or savings account.
  • Make sure you have money coming due regularly to provide you with several options should the need arise.

Will Your Money Last Through Retirement?

No one wants to run out of money. But without goals and a solid plan,
how can you know for sure whether you’re on the right track?

Will I be able to maintain my current lifestyle?

What will my monthly income be in retirement?

Can I protect my hard-earned savings and still
have the income I want?

Rodgers & Associates answers questions like these every day.

Get Personalized Answers
2025 Lititz Pike, Lancaster, PA 17601
Phone: 717-560-3800, Toll-Free: 888-876-3437