Rethinking Retirement  

Emergency Fund Tips

Everyone knows they should have an emergency fund. But just how much should be in it, where should you keep it, and when should you use it are common questions. Here are a few answers to those and other questions.

  1. An Emergency Fund is a backup pool of money that usually consists of anywhere from three- to six-months worth of living expenses. If yours is a two income household and job security is good, you may be able to get by on the shorter end of this scale. If you are a single income household or job security is tenuous, shoot for the long end. 


  2. This money should be designated and set aside for emergencies only. Many people practice what is called "put and take" savings, where they put money into savings every month because they know they should, only to end up taking it out by the end of the month to pay ordinary bills. Not only is this not an emergency fund, it's really not even savings as it is being consumed every month.   Your emergency fund should be a "put and keep" type account where you add to it every month, and keep that money there for everything except a true emergency (unexpected loss of job, illness or injury that prevents work and incurs large bills, etc.)


  3. Add to your Emergency Fund every month. Contributions to your emergency fund should be allocated in your monthly cash flow as a monthly fixed expense. Even after you've reached your emergency fund goal, continue to contribute as any excess amount that you build up over time can be invested or used to treat yourself to an unplanned vacation or other extravagance. The real benefit however, is that by continuing to contribute you have already built into your cash flow a mechanism to re-build this account after the unexpected emergency drains it.


  4. Safety is the most important attribute of this money. Don't be tempted to risk that safety for a higher return. Many times the same economic downturn that causes someone to lose their job - and therefore have need of this money - is accompanied by a declining stock market. You'll designate other assets for higher returns, but this money must be kept safe. One strategy recommended by financial advisors is to "ladder" your Emergency Fund by putting one month's worth of expenses into six different 6-month CD's with a different one maturing each month. That way you'll always have money coming free and available without penalty each month if you need it, and you'll also be receiving slightly better returns on that money as compared to saving or checking accounts.


  5. To know how much you should have in your emergency fund, you need to know your living expenses and a realistic expectation of how long it would take to secure another job if necessary. While loss of a job is not the only reason you may tap your emergency fund, it is one of the most common. If you are highly specialized and live in an area with few opportunities to do what you do, you'll want to lean more toward a six-month (or longer if truly specialized) emergency fund. If you have highly transferable skills and jobs are abundant, you may get by with only three months. The goal of course, is to have money readily available should your regular income stream be interrupted. You do not want to be forced to tap into qualified retirement accounts or other accounts you've established for specific goals.


  6. An emergency fund should not be considered the same as a Transition Fund if you are seeking a new career. If you are planning to make a career move and know that you will be interrupting your regular stream of income, try to save for that transition in addition to your emergency fund.


Keith Weber, founder of the Rethinking Retirement Institute, spent 20 years in the financial services industry. He is now a consultant, speaker, and Certified Professional Retirement Coach helping people prepare for the non-financial aspects of retirement. The information presented here is for educational purposes only. Please consult a qualified financial advisor for assistance regarding your specific situation. Keith can be reached at or for more information, visit


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