:
Welcome to the Meaning of Money podcast, your source of financial education in under 10 minutes. I'm your host, Shelitha Smodic, certified financial planner and financial educator. Today we're talking about saving for emergencies, starting with why we save for emergencies in the first place. Let's get started. Unexpected expenses like car repairs or medical bills can wreak havoc on your financial plan. These emergencies may exceed your cash flow and require funds from other sources. Planning for emergencies by saving for the unexpected can be an excellent way to build a safety net for yourself, allowing you to handle major unexpected expenses without falling into debt. Emergency funds can also help protect against the impacts of temporary job loss, where your expenses are the same but you either have no income or significantly diminished income. So how much should you actually be saving for emergencies? The amount that should be held in an emergency fund will vary by person or by family. A standard benchmark is to have between three to six months of living expenses in an emergency fund. This is quite a large range for a benchmark if you think about it, but the appropriate amount of cash to keep on hand for emergencies is based on other personal factors, like the stability of a person's income, the composition of their household, or even your personal comfort level. For example, if you have a home with two income earners with steady, regular paychecks, three months of living expenses may be an appropriate benchmark. If you are a single person working as a freelancer with considerable variation in your income, saving six months or more of living expenses can make a whole lot of sense. When thinking about where to keep your emergency funds, consider keeping your emergency fund in an account that gives you easy access to the money, but not so easy that you can conveniently dip into the assets for non-emergency expenses. Liquidity, which is the ability to convert an asset into cash and how quickly and easily you can do that. It's also essential when considering an account to hold your emergency fund. Of course, the most liquid asset is cash. So having an account with cash or a cash equivalent such as a certificate deposit, also known as a CD, what offer the most ease in accessing your emergency funds? I personally recommend keeping your emergency fund in a high-yield savings account. High-yield savings accounts offer three benefits to holding emergency funds. First, high-yield savings accounts are convenient, making it easy to deposit and withdraw cash when you need it. Since your money will already be held in cash, there's no risk that you would need to pull your money out of the stock market at a disadvantageous time or be unable to sell something when you need to have cash rather quickly. Second, the cash is earning interest, so it isn't sitting unproductively in a checking account for an extended period of time. Finally, the money in a high-yield savings account is accessible but typically less accessible than a traditional savings account. High-yield savings accounts usually have some withdrawal limits, like six withdrawals per payment cycle, which can help you to refrain from randomly dipping into the account as well. I wanna touch on the fact that having cash on hand for emergencies is a fantastic idea, but really you don't wanna keep too much of your money or your savings in cash. Using the benchmark of three to six months of living expenses can have the added benefit of ensuring that you don't have an excessive amount of cash on hand. Having too much money in cash can actually open you up to a different kind of risk, inflation risk, which is where your purchasing power of the cash that you have is not keeping up with the current cost of goods. And since we know that cash is a fairly safe asset, you don't typically get a good return on funds that are held in cash over a long period of time. So once you reach your target emergency fund amount, additional cash should be diverted into accounts or assets that can earn larger returns by taking on more risk. So ensuring you have a diversified portfolio of assets can protect against this inflation risk factor. Finally, I want to touch on the fact that financial professionals like myself often talk about ideals when we're discussing emergency funds as with so many other personal finance benchmarks. However, the key message here is to have some money put away for emergencies that is separate from your checking account but still accessible to you. It really is that simple. You could set a goal for yourself of just putting $100 to start with and then bumping that up to $500. and then to $1,000. Or perhaps you have some savings that you just haven't added to in quite a while. Consider transferring another $100 to that account or making deposits into that account regularly and automating that process so that you don't have to worry about doing it yourself every month. Something is better than nothing. So set a goal based on your unique situation and just begin. That brings us to the end of today's episode. If you find our podcast valuable to building the financial life you want, subscribe, leave us a review, or share with others who may find this information insightful. Bye for now.