What Is An Emergency Fund & Do I Need One?

What is an emergency fund? Classically, an emergency fund is a pot of money that you can dip into in the event of an emergency that doesn't require you to borrow money. So it is cash. Almost always it's cash. It's sitting in your safe at home, in your drawer, under your bed. It's in a checking account, it's in a high yield savings account, it's in a money market fund. Maybe some of it's in something like I bonds or something that you've had for at least a year and can sell on a moment's notice. But this is money that you can use instead of borrowing. You can use it in the event that you get a call that Grandma's dying and you need to come see her before she dies and come to the funeral. It's money you can use when the washer and dryer conk out. It's money you can use when your transmission dies or your $4,000 car dies. You can probably replace that out of an emergency fund. But it's classically three to six months worth of expenses, not income. So if you're making $10,000 a month, you don't have to have a $30,000 emergency fund. If you're only spending $5,000 a month, you only have to have $15,000 emergency fund. Right. So it's all about your expenses. And the more stable your financial life, the less you can get away with. If you're pretty unstable in how your financial life goes, maybe you need six months of expenses. I like to keep mine somewhere where it earns a little bit of interest, but it's still very liquid. That means either a high yield savings account or these days you can usually earn more in a good money market fund, such as the Vanguard Federal Money Market Fund. So that's probably where most people have most of their emergency fund. I do think it's important to have some in a local institution, someplace you can walk in and get cash out, you know, in an hour. And I think it's important actually to have a little bit of cash at home. I think that's part of an emergency fund as well. So make sure you get that in place. Don't go chasing yield with it. It's about the return of your principal, not the return on your principal, but it needs to be kept fairly safe. Now, does there come a time when maybe you don't need an emergency fund? Sure, sure. If you're retiring and part of your retirement asset allocation is 5% of your money in cash, and that adds up to be, I don't know, $300,000? You don't need an emergency fund, too. Your entire portfolio is your emergency fund. So there comes a time when maybe an emergency fund isn't so important, but that time is certainly not in the first five or 10 years of your career. The hosts of the White Coat Investor are not licensed accountants, attorneys, or financial advisors. This podcast is for your entertainment and information only. It should not be considered professional or personalized financial advice. You should consult the appropriate professional for specific advice relating to your situation.