Finfluencers and Financial Advisors alike tell you that you should have an Emergency Fund equal to three to six months of your fixed expenses. Thus, if your fixed expenses are $6,000/month, your emergency fund should be between $18,000 and $36,000. Further, this money should reside in a High-Yield Savings Account (HYSA) or a Money Market Mutual Fund (MMMF) where it will earn better interest than checking or local bank savings. 

So far, so good. But if this is best practice, why do so few people get it right? Why am I regularly hearing horror stories about people depleting their emergency funds for things other than an emergency, only to be in deep “doo-doo” when an emergency hits? Why am I hearing about people who regularly dip into their emergency fund for run-rate expenses? This is not a challenge exclusive to cash-strapped people.  Plenty of high cash flow households dip into a single pot of money until it becomes dangerously low.  

I thought I’d demystify why we financial professionals tell you to have an emergency fund, why an emergency fund is (and MUST BE) separate from all other money, and what constitutes an emergency. Mind you, there are few hard-and-fast rules because this is not just math, it’s human nature.  

Let me start with some truths:   

Truth 1: As an adult, you will regularly have unplanned expenses. But unplanned expenses are not necessarily emergencies. They only become emergencies when your liquidity doesn’t meet your needs, leading you to use a source of funds that charges you interest, like a credit card or line of credit. 

Truth 2: If you run out of cash in your checking account on a regular basis, you are living beyond your means. Either cut back or get a second job.  

Truth 3: If you regularly have the same or similar unplanned expense(s), you need an additional savings bucket. I’m a fan of bucketing versus budgeting. (I maintain that everyone hates budgeting.) And I have a Free Aspirational Bucketing Course you can take, no strings attached, to learn how to manage your cash flow using buckets. 

People who get what they want and don’t suffer cash flow problems tend to have an emergency fund, a F**k You Fund, and a bucket for each category of regular expenses (home/car maintenance, extra taxes, veterinary, etc.).

Financial professionals want you to have an emergency fund so you can sleep well and NOT use sources of funds that charge you high interest rates. We want you to pay off your cards at the end of each cycle. And we want you to have enough excess so that you are covering your fixed expenses, saving for retirement, and having a little fun too.  

If you have stable employment, three months of fixed expenses in emergency is adequate. If your job is less stable, six months in reserve is better. And if you work for a startup, or you are a commissioned salesperson, you should save as much as you need to manage the financial stress of “lumpy” income. 

It’s important for your emergency fund to be separate so you can clearly see where your money is going. Putting everything (vacation, taxes, a home renovation, unexpected car repairs, etc.) in the same account will leave you exposed when you have a $10,000 emergency veterinary bill.  

What’s more, we do want you to use your emergency fund if you find yourself unemployed or if you experience a true unplanned expense.  

So, how do you know if something is genuinely an emergency? You’ll know because it’s both unplanned and unforeseeable.  

Some emergency/non-emergency examples: 

I tell clients that your emergency fund is the one bucket that is inviolate. All other planning buckets you may borrow from and trade. Putting off that vacation to Thailand in favor of a staycation? Go ahead and take a bit from your vacation bucket to upgrade the backyard barbecue. But an emergency fund is only for true emergencies. And if, sadly, a true emergency occurs, you’ll be glad and relieved you have it as a backstop. 

Here's the last item on this: For many people, it takes a long time to build up their emergency fund. And that’s okay. Start with a goal of one month of cash, then two, then three and so on. Build up and replace the funds as quickly as you can. Maybe you’re the kind of person who dedicates the income from a second employment or side gig to pay off debt, student loans, or to build an emergency fund. That’s a great idea. But only you know the right size of your emergency fund.  So don’t stop with the first hunk of cash. #WeRescueOurselves #NotYoungNotDone 

If you want to learn more or have questions for me about your finances, become a subscription member of Financial & Longevity Planning in the Madrina Molly™ Community. If you’d like the company of other Women of a Certain Age(ncy), join our free Shared Wisdom discussions or take individual courses. 

Copyright © Madrina Molly, LLC 2024. All rights reserved.

The information contained herein and shared by Madrina Molly™ constitutes financial education and not investment or financial advice.

Sherry Finkel Murphy, CFP®, RICP®, ChFC®, is the Founder and CEO of Madrina Molly, LLC. 

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