How Much of an Emergency Fund do You Need?

How Much of an Emergency Fund do You Need?

By: Martin M. Shenkman, CPA, MBA, JD

Even if you have the best power of attorney and living trust deal, if there is no cash available in the case of an emergency, your planning will be for naught. How much ready green do you need?

  • Emergency funds are not limited to just cash in bank, but can be satisfied from lines of credit, home equity lines, and other sources. It is important to think in very broad terms, but still be practical. What hoops do you have to go through to tap a home equity line? Will the lender let your agent under a power tap into it? Many will not (but if you have a check book, the agent may be able to simply use those checks).
  • When evaluating emergency funds, the scope of insurance coverage needs to be considered. If you have a good disability policy with, say, a 60-day waiting period, your needs for emergency funds are different than if you have no disability coverage. Similarly, if you have a good long term care policy, versus none, your emergency fund in your retirement years will differ.
  • How risky your investment policy is, and how long term your investment horizon is both affect your need for emergency money. If you are focused on more short term and liquid investments say 40% equity, 60% bonds/near cash, your need for emergency cash and funds will be less than if you are 70% equity and 30% bonds. You will need the cushion to ride you through market ups and downs.
  • Your benefits at work are another significant consideration. What type of support system is there? How secure is your job and those benefits?
  • Like we said, you do not need “cash” for an emergency fund. An emergency fund means readily available cash, not actual cash. Increase the lines on your credit cards, take out a home equity line, and create a margin account for your securities. These all give emergency cash quickly in case an emergency creates a cash need while you are building up your investment reserves. This is common for post-divorce and young people starting out.

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