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Make meaningful improvements to your finances every week.

The Importance of Emergency Funds with Miranda Marquit

Miranda-Marquit

 Personal finance writer Miranda Marquit will explain what an emergency fund is and why it’s vital to have one.

Miranda began her career as a science writer after graduating from Syracuse University but eventually found her niche writing on personal finance.

Now that we’re in a temporary economy where thirty year jobs  followed by a pension are a thing of the past, an emergency fund is more important than ever.   An emergency fund provides peace of mind should you lose your job or face a situation as mundane but urgent as your refrigerator, carefully packed with your week’s worth of pre-made lunches, dying.

An emergency fund insures against life's unexpected expenses.

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How much should be in your emergency fund?  The rule of thumb is six months of expenses.  This may seem daunting but it’s important to consider two things.  First of all, utilize the resources that are available to you such as unemployment benefits, food pantries, and charitable organizations.  Secondly, if you lose your job tomorrow, you aren’t going to continue to live the same lifestyle.  You’ll cut the cable, the daily Starbucks habit etc.  So the amount you are spending monthly while working can be shaved down should a job loss happen.

How do you start an emergency fund?  A little at a time, the same way you tackle any project.  If you’re using Mint, and you should be, you can find areas to cut that will allow you to grow your cash cushion, Trade Mark Matt, faster.

Where should you keep your fund?  Miranda reinforces what Andrew has taught us.  The majority of your fund should be invested.  As it can take about a week to access this money, three weeks expenses in a high yield savings account is a safe bet.  If there is a bigger expense, sell the stocks that have been performing poorly so you have the cash and the tax break.

We hope that this episode and Miranda’s expertise will encourage you to start your emergency fund today.

Show Notes

Miranda Marquit Miranda’s personal site

Wise Bread Living large on less

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  • Currently, I’m still taking a baby steps towards building my emergency fund. I totally agree that “the emergency fund insures against life’s unexpected expenses”.

  • Investing the emergency fund other than three weeks expenses dissolves its very much purpose.Investments can go up or down and nobody would like to loose his/her emergency fund because of market conditions.I believe parking your emergency fund in some quality Liquid Mutual Funds is better option.Here you get much needed security,returns comparable to Fixed Deposits,no buying or selling charges.

    • Bikramjit, I agree investments can go up and down however you fail to consider that keeping money in a savings account allows your money to ONLY go down. Interest rates do not keep pace with inflation so every day you keep your money there earning nothing you lose a little to inflation.

      I would also like to add that the idea of an emergency fund is to only tap it when there is an actual emergency. If that is the case you will have minimal expenses and it is extremely unlikely that a significant portion of it will be wiped out at any one time – if you diversify or invest in bonds/index funds through a service like Betterment.

      • I got your point Andrew, but I believe it is always better if one keeps his/her investment and emergency fund separate. One never knows when he/she has to face the times of 2008 when there are job losses along with stock market crashes leading to negative returns from the investments which could be his /her emergency fund put as investment to beat the inflation. Liquid funds portfolio consists of bonds and other short term market instruments and are relatively averse to unfavourable market moves.Hope I made my point clear. Anyways, thanks for having a discussion.

        • I think that if you’re always waiting for the crash with your money on the side lines you’ll never actually wind up investing and then you’ll miss out on the growth you need for financial freedom.

          Yes, if you poorly time your investments you can stand to lose a lot of money – that is fact. However, we advocate Dollar Cost Averaging where you contribute consistently to your investments over a long period of time. That will help you avoid timing the market poorly.

          If you regularly contribute to something like Betterment you may live through another situation like 2008 but you must keep in mind that not all of your investments were purchased at the peak. Sure you will lose money off the peak but it is quite possible that many of your contributions were at prices much lower than the peak so you stand to lose much less money.

          It’s important that you don’t consider everything in absolutes. If you buy a share stock at $5, then it rises to $50 during a bubble and then crashes down to $10 you need to remember that you made $5 from your initial investment. We need to rise above fear and emotions to consider the math.

          • The example of crash is only to make understanding easy Andrew. What you are talking about is Investments and what I want to say is that one never should invest the Emergency Fund.It can be parked in a short term fund which gives safety as well as growth. But you can’t go only after growth with your emergency fund .After having an Emergency fund safe, one should look for investment with the other spare cash.This is how I believe and I personally do that too.

  • Corey

    I disagree with keeping your emergency fund in a taxable investment account. Not only is it high risk, but youre most likely to need the money when the market is down. E.g., I’d wager that youre far more likely to lose your job when the economy is crap compared to when it’s at all time highs… Given this, I’d advocate for one of two strategies: 1.) place the money in a high yield savings account and increase your contributions to stymie losses from inflation, or 2.) ladder the money into I Bonds. i.e., take a quarter of your emergency fund and purchase an I bond. Next year, take the second quarter and purchase another. Repeat until all of the money is in I bonds. Even though you can’t touch the money in an I bond for 12 months, 75% of your e-fund is ALWAYS liquid. Additionally at year 6, the first set of Ibonds have matured for 5 years and have no penalty for exercise.