Let's Talk... Emergency Funds

Let’s talk about emergency funds.

A question I get asked all the time is, “How much money should I keep in my emergency fund?”

The amount depends on a lot of different factors, such as:

• Income

• Expenses

• Lifestyle

• Dependents

And like most things in personal finance, the answer is “it depends.”

On one hand, you don’t want to keep too much cash because you’re losing value to inflation.

On the other, you don’t want to keep too little cash in case an emergency does happen (hence the name emergency fund) and you don’t have the means to cover it.

If you’re stuck, here are some guidelines to help you figure out how much cash you should keep on hand in case of an emergency:

Employee: 3-6 Months

If you are a W-2 employee with a relatively stable job or a multi-income household that isn’t dependent on a single source of income, 3-6 months of cash on hand should be enough.

Self-Employed: 6-9 Months

If you are self-employed, a freelancer, or an independent contractor, and are commission-only, it’s probably best to have a little extra cash on hand. In any of these cases, 6-9 months of liquid cash should tide you over in case anything major happens.

Business Owner: 9-12 Months

If you are a business owner, you probably have employees working under you and many expenses and overhead costs. It’s not a bad idea to have 9 months to a year’s worth of expenses readily available to meet all your business obligations if you have a down year.

Closing Thoughts

At the end of the day, you should keep as much money on hand as makes you feel comfortable.

Just make sure you park it in a high-yield savings account (HYSA) so you make a little money while it’s just sitting there.

Darrell