Client Question: Emergency Savings

May 20, 2022

This week’s question is a popular one – with an equally unpopular answer.

Question: What do you mean by emergency savings and how much should I keep in that account?

Answers: It depends

I know, I know. “It depends” can be a very frustrating answer and it is one that I find applies to many financial planning and investment discussions. However, the good news if that for this question (and countless others), there are factors you can apply to your own situation that should allow you to reach a conclusion.

What is emergency savings?

Let’s start by defining emergency savings – which I more commonly refer to as cash reserves (some people like the term rainy day fund). This is cash you keep in the bank for, you guessed it, emergencies or unforeseen events.

Life is unpredictable and while the majority of our expenses are planned and covered by our ongoing wages (or planned spending of savings if you are retired), things always come up. Perhaps it’s a one-off expense you didn’t budget for – such as a roof, car accident, or medical bill. It could also be payment of recurring necessary costs (such as rent and food) in the event you lose your job. And of course, given that life is inherently unpredictable, there are many other possible items that can arise.

What form should my emergency savings take?

In my view, these funds should be highly liquid – preferably kept as cash in the bank (savings or checking account, remaining mindful of FDIC limits). You want these funds to be readily and consistently available to you should you need them. These funds are separate and apart from your investment portfolio (and any cash allocation within in), as well as separate from your day-to-day checking or spending account and any earmarked discretionary savings (ie: vacation fund). These funds should be in the bank and left as-is (or added to) until such time an unforeseen event occurs

What items should I consider to determine my balance?

Here’s where the “it depends” comes into play. It truly does involve consideration of your own specific set of circumstances, but here a few items you can consider for your own evaluation and analysis:

1.) What are my monthly non-discretionary expenses?

These are items you need to live your life (such as medical insurance, housing, utilities). These are NOT “nice to have” expenses like streaming services and eating out. If you lost your job tomorrow, you could cut out some expense but some would remain (sans you uprooting your life and exposing yourself to undue risk). What is that numerical amount for you and your family?

2.) Is there another source of income?

Are you in a two family household? If so, if something were to happen to your income, could that other income source help carry the weight (ie: number determined in Item 1) until your income can be replaced? If not, what’s the shortfall?

3.) How employable are you?

If you lost your job, how quickly do you believe you could find another one? While this can be a tricky thing to determine, consider factors such as your skill set, state of labor market, past experience, and roles that you could pursue. Typically, we advise planning on 6-12 months but understand this can vary considerably

4.) What major exposures do you have?

Evaluate your life and its associated complexities (or lack thereof) Do you own or rent? If you own, are there household items you know are approaching the end of their useful life? Same thing for your car. What is your max out of pocket for insurance coverages?

5.) What helps you sleep at night?

There is the quantitative side of this question that we have covered thus far – and there is also an equally important qualitative one. Some individuals just sleep better knowing they have meaningful amounts of cash on hand (above and beyond what the “math” says). Know yourself – and adjust your figure accordingly

How do I calculate my targeted balance?

Knowing all the information above as it applies to you, here is a suggested calculation methodology

A good place to start is to multiply your monthly non-discretionary expenses * the number of months you believe it would take you to replace your income. Again, for most individuals, we target 6-12 months of expenses. Should you wish to adjust this for spousal income, feel free.

To that number, we can then add some additional cushion for other potential exposures that apply to you and your family (for house, insurance, car, etc). And again, if you feel that added cash levels will bring you further comfort and peace of mind, additional savings should be considered as both the quantitative and qualitative matter in this equation

Do I leave these funds alone forever?

As the name implies, these funds are for emergencies. Your A/C dies? Consider using these funds. You need emergency surgery and have to pay your full deductible at once? Spend away. Want to take a trip with your family – or to buy a new patio set? Consider saving for those goals separately.

Hopefully this information allows you to evaluate your own emergency fund levels. If you find you do not yet have the desired level, put a plan in place to build up to it over time. We recognize many people can’t build these savings over night. However understand where you are trying to get to – and taking steps to reach that goal – is an excellent and important building block in your financial journey

Until next week,


Note: All commentary above is as of the date of this post and is for education and informational purposes only. Windermere and its principals do not intend for this to serve as investment advice and are not responsible for any actions taken based on this article. Consult your financial advisor before taking any actions as it relates to your own investment portfolio

Leave a note

  1. Nick Perricelli says:

    I really enjoyed reading through this post! Following this Framework and having an emergency fund during a rough patch for me in the pandemic made an incredibly stressful time much more manageable. Thanks, for posting Pam!

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