Issue #41: Break glass in case of (money) emergency

OK, sold. But I’m still confused about the math here. Recommendations range from three months of expenses to six months of expenses to half my salary — and that’s a BIG range for someone like me. What gives?

The reason the estimates vary so widely is that each person’s situation is different. Richardson said if I’m in a single-income household or self-employed, I probably want to sock away six months of fixed expenses. If I’m part of a double-income household and not concerned about losing my job right now, three months is fine.

(FWIW, the Bureau of Labor Statistics says the average duration of unemployment right now is just over 17 weeks, or about four and a half months.)

Now, about those fixed expenses. Richardson said that she’s basically referring to any crucial bill — think rent, groceries, health care, utilities and loans. Haircuts, gel manicures and Chipotle orders don’t count because those are things “you would cut from your budget in the event of a job loss or another major disturbance,” she adds.

Once I’ve determined how big my fund should be and I’ve scraped together the cash, I’ve got to figure out where to stash it. Fred Egler, a CFP with robo-advisor Betterment, said I should keep my emergency savings in a different place than from my regular spending money. 

“You don’t want it to be jumbled together with your checking account or retirement savings or saving for your kids’ education,” he says. “Make sure it’s separate so you’re not double dipping or intermingling.”

A high-yield savings account, money-market fund or CD might be a good option so I can earn interest on the funds. I just want the emergency savings when the time comes. 

According to Egler, I’ll know it’s time to tap into my fund when things take a turn for the worse. It’s a break-glass-in-case-of-emergency situation.

“If the sirens and alarms are going off in your head and [you think] ‘I don’t have many other options; I’m kind of stuck here,’ it might be time,” he says. “It’s your money. You’ve saved it, and you have the ability to use it. Be judicious and know when to pull that money out when you’re in trouble.”

(but please don't tell me you scrolled past all of my hard work)

My emergency fund should contain between three and six months of nondiscretionary spending. I should put it in a separate account where my money can work for me and only touch it if I feel my position is truly dire. 

If I’ve done all of that and I’m still feeling extra uneasy because of the pandemic, Egler said I should consider having a bit more cash on hand. 

“Keeping more money in your checking account right now might be a good strategy because of that uncertainty,” he adds. “It might make a little more sense to keep more than a month, maybe two months, [there] so you can cover expenses that come up — and provide you with peace of mind.”

via GIPHY

check out this crazy celebrity purchase

via Getty

Author J.K. Rowling recently bought her childhood home in England, paying about $500,000 for the cottage she lived in from age 9 to 18. The house is said to have inspired some key elements in the Harry Potter series — for example, it has a cupboard under the stairs. There’s also graffiti in one of the bedrooms where a young Rowling wrote a message on the wall. How very Chamber of Secrets of her.

five things I'm loving online right now

send me cute pictures of your pets, please

CREDIT: CHRISTINE A.

This is Baby Duke, a pup who lives in California. His emergency fund is mostly bones, but we’ll let it slide.

I’m running low on 401(k)9 and 401(k)itty contributions. I demand you send more pet pics ASAP! (Please.)

See you next week.

Julia

P.S. Where do you keep your emergency fund? What advice are you tired of hearing? Have you finished Outer Banks yet? HMU at julia.glum@money.com or @SuperJulia on Twitter.