It’s always a good idea to save some cash for a “rainy day.” An Edward Jones financial advisor can help make sure your savings support your overall financial strategy. After all, you’ve worked hard to keep your financial strategy on track, right? An unexpected expense could easily derail that strategy.
One way to prepare financially for things like these is by creating an emergency fund. We know that putting money away to prepare for the unexpected can be hard, especially if you don't know how much you'll need – after all, they call these unexpected expenses for a reason.
What is an emergency fund?
An emergency fund is a savings account used pay for large, unexpected expenses. Should an emergency happen, you’ll be able to use money to cover your losses.
An emergency fund can help you save and prepare for:
- A job loss or early retirement
- Large housing or auto repairs
- Expenses related to child care or aging parents
- Large medical bills
- An unexpected accident
How much emergency savings should I have?
As a starting point, consider putting at least three to six months' worth of expenses in your emergency fund. More specifically:
- If you're still working - Add between three and six months' worth of living expenses
- If you are retired - Add up to three months of living expenses for emergencies, as well as about 12 months' worth of living expenses (after accounting for outside sources of income) to provide for your everyday spending in your emergency fund.
Why the ranges? If you're employed, these guidelines factor in the average length of unemployment – four months – as well as the potential for other needs. If you’re retired, you face many of the same potential emergencies (excluding a job loss) – except you are now also responsible for creating your own "paycheck" for your everyday expenses.
Regardless of whether you're working or not, you may also want to look into your access to a personal line of credit. It can help you supplement your emergency fund if the need arises.
How much should I have in cash for other USES?
While you might think “the more, the better,” that isn’t necessarily the case. Having too much of your savings sitting in cash can be an issue, especially when you’re investing for long-term goals such as retirement. Ultimately, your cash strategy can be a key factor in your long-term financial success.
To determine the role of cash in your financial life and how much you should have, look at your “USES”:
- Unexpected expenses and emergencies – cash used for situations such as a job loss, a home repair or an unplanned medical expense
- Specific short-term savings goals – cash dedicated for a goal that will occur within the next year or so, such as a wedding or vacation
- Everyday spending – cash used for your lifestyle and day-to-day spending needs, such as groceries, utilities, mortgage and debt payments, and entertainment
- Source of investment – cash used as an asset class and as a source for investment opportunities
Use the chart below as a starting point to think about how much cash you may need for different USES:
This chart is a starting point to think about how much cash you many need for different USES, depending on if you're retired or still working. The "U" in USES stands for "Unexpected"; "S" for "Specific short-term savings goal; "E" for "Everyday spending"; and the last "S" stands for "Source of investment." For "Unexpected," the chart suggests pre-retirees have three to six months of living expenses supplemented by access to a line of credit, while retires have up to three months of living expenses supplemented by access to a line of credit. For "Specific short-term savings goal," the chart notes that for both groups, the amount needed is based on your specific short-term savings goal(s). For "Everyday spending," the chart suggests pre-retirees have one to two months of living expenses (refreshed" by your next paycheck), while retirees have 12 months of living expenses (excluding outside sources of income). For the final category, "Source of investment," the chart suggest both groups have 0% to 10% of fixed income (which is generally 2% to 3% of your investment portfolio).
How we can help you set up an emergency fund
As you can see, your cash need is as individual as you are. Your Edward Jones financial advisor can look at your entire financial picture and help you calculate how much cash you may need to fill your “rainy day” bucket and what should be invested to help you reach your goals.