Find out how much emergency money you need, the best places to put it, and whether investing it is a smart financial move.
Not only does having a safety net protect your finances, it gives you incredible peace of mind and eliminates stress.
How Much Emergency Money Should You Have?
So, how much emergency money should you have? While no one can predict the future, I recommend that you have enough to cover your living expenses for at least 3 months.
Living expenses are just the basics, such as housing, utilities, groceries, and loan payments, and are not necessarily a full replacement of your income. For instance, if you could get by on $3,000 per month if you lost all your income, then always keep a minimum of $9,000 ($3,000 x 3 months) in reserve.
But having a reserve of 6 months or more is even better since finding a job could take that long, depending on your industry. It’s a good idea to evaluate your needs and adjust your emergency fund goal as your life and working situation changes.
Free Resource: Join the Dominate Your Debt Facebook Group - Laura's private group to help you tackle debt, build credit, and reach big financial goals!
The Difference Between Saving and Investing
Investing money means you could get relatively high returns, but that you could lose some or all of it.
Even though we tend to use the terms saving and investing interchangeably, they’re not the same thing. The difference has to do with taking financial risk.
The purpose of saving money is to keep it safe and free from risk so you’ll have it for emergencies and planned short-term purchases. The purpose of investing money is to increase your net worth and to achieve large, long-term financial goals, like retirement.
Remember the huge tradeoff between financial risk and return. Investing money means you could get relatively high returns, but that you could lose some or all of it.
Think about what would have happened if you lost your job in 2008 when the financial markets took a dive. If your emergency fund had been invested in stocks, the value would have plummeted and you could have been left with a tiny financial cushion.
On the other hand, you won’t lose money in an FDIC-insured savings or money market deposit account, no matter what happens in the markets, but you won’t earn much. Even though savings accounts pay a low interest rate that may not ever keep up with inflation, that’s the price you pay for keeping money completely safe.
The goal is to make sure you always have enough money to protect yourself from an unexpected emergency—not to earn high rates of return or be subject to market volatility.