By Sabrina Karl
A major plank of personal finance advice is to build and maintain an emergency fund, so that unexpected financial hits won’t throw your life off the rails. For some, the coronavirus pandemic has been such a setback. And for all of us, it offers a useful cautionary tale.
While no one can change their past financial decisions (or non-decisions), this global pandemic easily hits home how truly unexpected life can be, and how much difference a financial cushion can make to your financial well being down the road.
But it’s not enough to simply say, “I’ve got some money put aside”. Having enough, and having it held in the right place, are critically important decisions to make.
The common advice is to hold 3-6 months’ worth of your monthly living expenses in an emergency fund. For those with very secure jobs and more than one earner in the family, 3 months might feel sufficient. But for those with less stable income, or all of it coming from a single job, 6 months or even a years’ worth of expenses might be wiser.
Then there’s the question of where to put the money. The key is for it to be easily accessible, and not invested where it could be down in value at the time you need it. The most common recommendation is to store it in a separate savings account, where it cannot lose value. Another idea is to hold it in bank CDs, but only ones with reasonable early withdrawal penalties.
No one is expected to predict future events, such as a global lockdown causing a million-plus U.S. jobs to evaporate almost overnight. But we can prepare so that when financial turbulence hits, it’s temporary and solvable, rather than a disaster that sets back our entire financial future.