There is one piece of advice that almost every single financial planner, guru and expert agree on, and that is to set aside money for an emergency. And while that basic advice is useful, it leaves a lot of room for interpretation. After all, how much emergency savings is enough?
Determining an Emergency Savings Threshold
Emergencies can come from many different situations, but one of the easiest to plan for is unemployment. Generally, it’s advised that you figure out your monthly bills based on an emergency situation (during which you’d cut spending on luxuries such as cable) and multiply that total by six so that you have six months’ worth of expenses saved.
While we use a temporary job loss and the resulting six months of income loss as a basis for your emergency savings goal, that’s not the only crisis that could befall you. Your emergency could be a leaky roof, a burst pipe, a clogged water main, a car accident, and so on. That’s why emergency preparation isn’t just about having accessible cash; it’s also about having the right insurance policies, including:
- short-term disability
- long-term disability
- home or renters’ insurance
- health insurance
- auto insurance
Many of these policies will have waiting periods and/or deductibles that must be paid out of your own pocket. For example, a long-term disability policy may have a three-month waiting period (also called an elimination period) during which you have to support yourself before receiving benefits. Luckily, your six months of emergency savings can be used to cover that. A home insurance policy or auto policy may include a $1,500 deductible, which you may want to add to your emergency savings goal (remember that auto deductibles are often per incident rather than per year).
What to Do with Emergency Savings
As you can imagine, an emergency savings account can eventually hold quite a bit of cash. It needs to stay relatively liquid so that you can tap into it when needed but you may want to try and earn some interest on it. This can be done by keeping the funds in an interest-bearing account.
At Kramer Wealth Managers, we can help you determine the right amount of emergency savings to set aside and we can help you decide where to put the funds. Contact us today to get started on your personal WealthPath.