Why Your Financial Plan Should Include an Emergency Fund

Lily Styrmoe, CFP®, CSRIC™

May 6, 2020

I wrote this article back at the beginning of 2020. Before social distancing, when we could still buy tickets for Spring Training games, and before many of us were actually tapping into our emergency fund.

Now is a great time to really prioritize your Emergency fund as part of your Financial Plan to buffer against the current volatility we are seeing.

Planning Financially for Unexpected Life Events

Put yourself in my best friend’s shoes- we’ll call him Jake.

Jake has a new girlfriend who is very sweet, and they just moved into an apartment together. He is working for a river rafting outfitter out of Utah, guiding trips. He’s saving money into his Roth IRA, and can still afford to buy the craft beer that he loves to drink on his days off.

Then…BAM! Broken foot. Stepped off the boat wrong, tore some lateral ligament something, and he can’t guide for the rest of the season.

Jake still needs to pay rent, he still needs to eat, and likely he has some impending medical bills on the horizon. Jake needs to tap into his Emergency Fund.

And! Luckily, because Jake listened to his very smart best friend, Lily, he has saved up six months of living expenses that he can use while his foot heals.

When to Tap into Your Emergency Fund

You never know what your emergency might be- whether your car suddenly explodes, you break your nose during your new modeling career, or your employer suddenly “downsized” and you’re out of a job.

Having an Emergency Fund, typically three to six months of expenses (hopefully in a high-yield money market account), will prevent you from having to accrue credit card debt, tap into your 401(k) early, or your new sweet girlfriend to cover your rent for the next three months.

Emergency Funds Keep You on Track With Your Financial Plan

So! If you don’t have that Emergency Fund tucked away, maybe hold off on going on that next trip or buying your next lap top and prioritize getting your Emergency Fund built up.

I promise, you’ll thank me later. Still waiting for you, Jake.

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