Your Emergency Fund: How Much, Where to Keep it

| June 30, 2023

We talk a lot in our business about planning for events 20, 30, 40 years down the road. But the reality is that when you’re putting together a financial plan, one of the first orders of business should be to get an emergency fund established. Your long-term goals are critical, and one of the best ways to protect them is by having funds available immediately to handle unexpected events. That way you aren’t withdrawing funds meant to meet long-term goals and setting back your progress significantly.

When I talk about an emergency fund, I’m referring to a lump sum meant for covering the must-haves in your life in case something happens, such as a job loss. For me, that means housing (your mortgage or rent), utilities, food, health care and insurance premiums, transportation, and any other ongoing debt you’re paying off besides a mortgage, such as a credit card balance. You might have other personal expenses that you can’t do without. 

You might dip into this fund to help pay for, say, unexpectedly large home or car repair bills, but the idea is to have a cash reserve to handle critical expenses when you’re at a financial low point. For most, that means a job loss.

The question I’m often asked is how much to set aside. The most useful way to think about is in terms of time. If you lost your job, how long would it take you to get back up on your feet again? Most experts suggest that three to six months’ worth of expenses is enough of a cushion. I generally agree, but I’d lean more toward six months, if possible.

You’ll also want to understand your employer’s severance policy and what you’re entitled to, if anything, regarding compensation for unused vacation or sick pay if you leave. Many companies have changed their severance policies since the pandemic. But even if your company has generous policies, don’t let that affect how much you set aside. There’s a fair amount of risk attached to whether you’ll get what the company says you’ll receive.

As you’re nearing retirement, you might want to consider increasing the cash reserve up to a full year of critical expenses. At this stage of your life, it’s even more important to protect your goals.

Another question people often ask is where to hold this money. The primary purpose of this fund isn’t for investment, but you don’t need to keep the money under a mattress. There’s nothing wrong with having with having it in low-risk, low-interest-rate vehicles that you can convert to cash quickly. Besides money market funds and CDs, I’ve seen promotions for savings accounts offering over 4% annual interest recently.

 If you’re just starting out, you don’t have to fund the entire amount right away. But I’d make it a priority and build it up over time so that you can shift your focus over to meeting your long-term goals.


Evan R. Guido is the Founder of Aksala Wealth Advisors LLC, a 2018 Forbes Next-Gen Advisors List Member, and Financial Professional at Avantax Investment ServicesSM. Evan heads a team of retirement transition strategists for clients who consider themselves the “Millionaire Next Door.” He can be reached at 941-500-5122 or   Read more of his insights at Securities offered through Avantax Investment ServicesSM, Member FINRA, SIPC.  Investment advisory services offered through Avantax Advisory ServicesSM, Insurance services offered through  an Avantax affiliated insurance agency.  6260 Lake Osprey Dr. Lakewood Ranch, FL 34240.  The views and opinions presented in this article are those of Evan R. Guido and not of Avantax Wealth Management® or its subsidiaries.  Past performance does not guarantee future results. The S&P 500 is an index of 500 major, large-cap U.S. corporations. Standard & Poor's is a corporation that rates stocks and corporate and municipal bonds according to risk profiles. The S&P 500 is an index of 500 major, large-cap U.S. corporations. You cannot invest directly in an index.  An investment in a money market fund is not insured or guaranteed by the FDIC or any other government agency.  Although the Fund seeks to preserve the value of your investment at $1.00 per share, it is possible to lose money by investing in the Fund.  CDs are FDIC insured and offer a fixed rate of return.  They do not necessarily protect against a rising cost of living.  The FDIC insurance on CDs applies in case of insolvency of the bank, but does not protect market value.  Other investments are not insured and their principal and yield may fluctuate with market conditions. Investments are subject to market risks including the potential loss of principal invested.