What is an emergency fund?

It’s a sum of money set aside to cover 3-6 months of living expenses. This amount acts as a buffer, a “break-glass-in-case-of-emergency” chunk of money.

Why do you need an emergency fund?

1. Financial security: An emergency fund protects you from unexpected expenses, reducing stress and panic during emergencies.

2. Avoid debt: With a fund in place, you're less likely to rely on credit cards or loans, which can lead to high-interest debt.

3. Foundation for growth: An emergency fund gives you the stability to take risk in other areas of your investment portfolio, giving you better potential for growth.

How to build your emergency fund

Building an emergency fund might seem daunting, but it’s actually very straightforward.

Start Small, Aim Big

1. Set a goal: Determine how much you need by calculating your monthly expenses and multiplying by 3-6 months. To be safe, go with five months. 

2. Automate savings: Set up an automatic transfer from each paycheck to an account designated as your emergency fund. This way, you save consistently without thinking about it.

Where to keep your emergency fund

It's important to keep your emergency fund accessible but not too easily spent. DON’T KEEP IT IN CASH! Inflation will make this worth less over time. You want to keep your emergency fund invested to some degree so you at least keep up with or ideally slightly exceed inflation. Inflation is about 3.3% right now, so whatever you’re invested in has to beat this. 

Consider these options:

1. High-interest savings account: Offers a safe place for your money with a decent return, often over 5% these days.

2. Money market accounts: These accounts may offer higher interest rates while providing easy access to your funds. You can check out

   1. North Capital Treasury Money Market Fund (NCGXX): 5.4% target return

   2. Vanguard Federal Money Market Fund (VMFXX): 5.3% target return

   3. Schwab Value Advantage Money Fund (SWVXX): 5.2% target return

3. Short-term CDs: For those who can commit to not touching their funds for a short period, Certificates of Deposit (CDs) can offer higher returns. But be careful! Your money is locked in these for a set period of time. 

What do I do? I’m flattered you ask. My emergency fund is 90% in money market accounts and 10% in a passive global stock ETF. Why? Because the allocation to global stocks will help even more with fighting inflation. 

Tips for maintaining your emergency fund

1. Review regularly: Check your fund every six months or so to ensure it aligns with your current expenses and financial goals. This is also a good check against lifestyle creep!

2. Top-up after use: If you need to dip into your emergency fund, make it a priority to rebuild it as soon as possible.

3. Avoid temptation: Keep the fund separate from your everyday spending account to avoid the temptation of dipping into it for non-emergencies.

Soooo convinced?

Having an emergency fund is key for financial stability and peace of mind. By setting up an automatic savings plan and choosing the right account for your fund, you can build a solid financial foundation. Start today, and protect yourself from life's unexpected twists and turns.

Remember, the key to financial security starts with a well-funded emergency account. Don't wait for a crisis—start building your safety net today!