Emergency Fund – How much is enough?

This past week I was listening to one of my weekly business audio podcast and the topic was building an emergency fund.

How much is often the question being asked and the answer will depend on your specific financial situation. Rule of thumb is three to six months worth of your monthly expenses, but even six months may not be enough.

Factors that you must consider is whether you are the sole income earner, stability of your job and how long in the case of a loss job will it take to find a new one. I serious doubt unless you are lucky and in high demand, that you will find a new job or career in three months or less.

If you are just starting out to build an emergency fund should you fund it first before contributing to a 401k, IRA or other investment plan? I would suggest in cases where you can contribute to your employer’s 401k plan, that you at least fund the 401k plan up to the percentage that your company will match after all that is free money.

Personally over the years I have my clients start an emergency fund on a small scale at first adding to it over a period of time in addition to funding pension plans and any regular investment program they might be considering.

Where should you park your emergency funds? The answer is a combination of checking, savings, CD’s, US Saving Bonds, money market funds. Remember you need to be fairly liquid in case you do find you in need of cash.

Shop around for the best yield’s either locally and online. An excellent resource is bankrate.com for comparison shopping. Check on US Saving I Bonds which are adjusted every six months in May and November. In many cases I found the “I bond” rates to be higher than most money market and one-year CD’s. However, you must keep in mind you cannot redeem in less than 12 months and any bonds redeemed less than 5 years you will lose the last quarter of interest.

Finally, do not invest any money in the “stock market” (stocks, bonds and mutual funds) if you are going to need liquidate (sell) in three years or less.

Daniel Iuculano

Financial Planner