Emergencies are unpredictable and unavoidable. The older you get the more you realize the last emergency was actually not the last. Understanding this cycle and being prepared is meant to help you and your dependents. Learn why for new parents building an emergency fund is so important and how my recent experience taught me to even tweak my original strategy.
My Personal Experience
Writing this post today is relevant for me personally because I recently needed to tap into my emergency fund. This past month I lost my job and got hit with a string of unpredictable medical examinations. When emergencies like these happen the last thing you want to worry about is: How am I going to pay for…? Add to that having dependents and building an emergency fund becomes that much more important.
Like many people, I read and heard that I needed an emergency fund. But I never felt the urgency at a young age. After marriage, I built a comfortable 6 month buffer. As the years went by the urgency to keep the balance that high decreased as my salary, net worth, and investment portfolio kept growing.
I got emotionally attached to this balance and got upset about the missed opportunity cost of what this balance could have grown to if invested. In fact, when we purchased our last home we even took $10,000 out of this account to put towards our down payment. As I’m tapping into the remaining balance for mortgages and medical visits, I now fully understand how wrong I was. Building an emergency fund is like buying life insurance. It should offer peace of mind and should not be included as part of your net worth.
5 Steps: Building an Emergency Fund
Step 1: How much do I need?
You need to assess your personal situation to find the magic number but for my Primary Reserve I plan to continue following the general 6 months rule. For peace of mind I will aim for 12 months. I include housing, food, personal expenses, and even light entertainment & activities for my kid as basic expenses.
But with the recent string of medical bills, I realized I need a Secondary Reserve fund with at least another $10,000 as an “additional” emergency fund.
Step 2: Where To keep it
I plan to keep my primary reserve in a high interest online saving account.
And my secondary reserve invested in a robo-advising platform (Betterment or Wealthfront) under a conservative allocation.
Step 3: start saving
I know, this is easier said then done. But this experience thought me the importance and urgency to start saving even a small amount. Every dollar counts when in an emergency.
Step 4: Don’t get attached
Don’t make the same mistake I did and use this money unless it is actually an emergency. Understand that building an emergency fund is not the same as building an investment portfolio.
Step 5: Repeat step 1
Every new life event or additional dependent in your life should require you to think about how much you need again. Building an emergency fund should be living and never ignored.