I’m a Financial Advisor: Here’s How Often You Should Reassess Your Emergency Fund
Written by
Jamela Adam
Edited by
Chris Cluff
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Life is full of twists and turns — you never know where it’ll take you.
While the unpredictability of life makes it exciting, it can also bring financial challenges when you least expect it. That’s why you must have an emergency fund to help you stay financially prepared for whatever life throws your way.
However, simply setting aside money for a rainy day isn’t enough. It’s just as important to assess your emergency fund regularly to ensure it’s still adequate for your needs. Here’s how often Kendall Meade, certified financial planner at SoFi, says you should assess your emergency fund.
How Often Should You Assess Your Emergency Fund?
“You want to re-evaluate your emergency fund anytime there is a change to your expenses,” said Meade. For example, if you change your job, move to a new city with a higher cost of living, or adopt a fur baby that requires you to shell out hundreds of dollars in dog food each month.
“When your expenses change, so will your emergency fund,” Meade added.
Personally, she reviews her spending for the previous month at the beginning of each month.
“During this time,” she said, “I will also review my emergency fund amounts and decide if any changes need to be made.”
So, if it has been a while since you last checked your emergency fund balance and your monthly expenses have changed substantially, it’s time to log into your savings account to see whether you have enough financial cushion to cover emergency expenses.
How Much Should You Have in Your Emergency Fund?
“The recommended emergency fund is three to six months’ worth of expenses,” Meade said. “Three may be enough if you are a dual-income family or have a very stable job, whereas six months may be better if you are a single-income family or have irregular income.”
So, if your expenses average $2,000 a month, your emergency fund should be anywhere from $6,000 to $12,000. This way, if you were to lose your income source, you’d have enough money in your bank account to tide you over until you’re more financially stable.
Ways To Put Excess Emergency Funds to Better Use
While stashing away as much cash as possible might seem like the responsible thing to do, you could be missing out on the opportunity to grow your wealth by overfunding your emergency fund.
When you overfund your emergency account, you’re letting your money stagnate and lose value over time due to inflation — especially if your cash is sitting in a traditional savings account with low APR.
Plus, because the Federal Deposit Insurance Corporation (FDIC) insures only up to $250,000 in savings accounts; anything above that amount in your emergency fund is essentially unprotected, leaving you vulnerable if the financial institution fails.
If you have excess money in your emergency fund to put to work, Meade recommends thinking through what your goal is for this money.
“If your goal is to put this money away for retirement,” she said, “then you may consider adding more cash to your retirement accounts such as a 401(k), an IRA or a Roth IRA.
“If you have a short-term goal, such as putting a down payment on a house, you want to first determine your time frame. If that goal is less than three years away, you’ll want to secure your savings. I’d recommend putting it in a high-yield savings account or a CD.”
On the other hand, she said, “If your goal is further down the line (more than three years away), it may be worth considering investing your money instead so it can yield better returns. A robo advisor can help you invest your cash in a diversified portfolio based on your time frame and risk tolerance.”
Besides the aforementioned ways to redirect the extra cash in your emergency fund, here are some other options to consider:
- Pay off high-interest debt
- Create an education savings fund
- Save for a vacation or your dream wedding
- Make charitable donations
- Invest in yourself by using the extra cash to fund your business
How To Build an Emergency Fund From Scratch
- Automate Your Savings: If you struggle with making consistent contributions to your emergency fund, set up automatic transfers from your checking account to your savings account so you don’t have to lift a finger. Plus, you’re more likely to stick to the habit of saving money when it requires minimal effort.
- Save Your Tax Refund: Most of us look forward to a sizeable refund when tax season rolls around. According to the IRS, the average tax refund amount in 2023 was $2,991. Instead of spending this lump sum on unnecessary items, consider funneling it directly into your emergency fund.
- Use a Budgeting App: Budgeting apps like Mint and Personal Capital can help track your income and expenses so you know where your money goes each month. This way, you can identify areas to cut back and reallocate toward your rainy day fund.
- Generate New Sources of Income: If cutting back on your monthly spending isn’t enough to reach your emergency fund goals, consider generating new income sources. You can do so by taking on a part-time job, freelancing, renting out a spare room in your house, asking for a raise or selling unused items online. You can then direct this extra income straight into your emergency fund.
Start Saving If You Have Not Already
Having a cushy emergency fund could mean the difference between weathering a financial storm or drowning in high-interest debt. So, if you have not already started putting money away into a savings account to cover unexpected expenses, it’s time to take action.
Remember, it’s never too late to start. Even saving $10 a month can provide some financial cushion when life throws you a curveball. Just make sure to reassess your rainy day fund whenever there are changes to your monthly expenses so you’re financially prepared for whatever comes your way.
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