Abstract: Back
in 2020 when the COVID-19 pandemic first hit, many people’s emergency funds were
suddenly put to the test. Now, presumably with the benefit of some hindsight,
the financially savvy might want to reconsider their approach to saving. This
brief article discusses some key points to keep in mind.
Reconsidering your personal emergency fund
Back in 2020 when the COVID-19 pandemic first hit,
many people’s emergency funds were suddenly put to the test — assuming there
was a fund at all. Now, three years later, and presumably with the benefit of
some hindsight, you might want to reconsider your rainy-day savings. You’ve
probably heard that, to guard against an emergency, you need to save enough to
cover three to six months of living costs. But this rule isn’t as
straightforward as it may sound.
An emergency cushion is indeed important — and it’s
certainly better to be conservative rather than cavalier when estimating your
financial requirements. However, believe it or not, there may be a danger to
saving too much in certain savings vehicles. For example, if you put away
substantially more than you’ll reasonably need in a low-interest savings
account, you may lose money to inflation over time. Plus, you might miss out on
opportunities to invest those funds in tax-advantaged retirement accounts or
other assets.
Instead of blindly following a rule of thumb, tailor
your emergency savings to your financial situation. A smaller emergency fund
may suffice if, for instance, your spouse has a reasonably secure job, you have
relatives who can provide financial assistance in a pinch, or there’s reason to
believe that you’d be able to find other work quickly if you lost your job.
Conversely, if you’re the sole breadwinner or you simply have a low tolerance
for risk, a bigger emergency fund may be appropriate. Our firm can help you
find the right balance.
© 2023