Emergency Funds

It is shocking how so many people were being overwhelmed by financial hardship just two weeks into this pandemic. Newsweek recently reported that half of Americans have no savings to fall back on if they contract an illness like coronavirus and cannot work.

Expectations of late rent, credit card and mortgage payments emerged in early March when furloughs and layoffs initially impacted restaurants, hotels, and retail stores. The financial fragility of Americans was apparent even before stay-at-home orders, closure of non-essential businesses and stock market declines occurred as the month progressed. Sadly, many people have little or no emergency funds to fall back on.

One of the essential building blocks of a robust financial plan is maintaining a reserve to fall back on in the event of unforeseen job loss or a health crisis. Incredibly, with the coronavirus we may have both.

How much to keep in this account depends on your family’s circumstances, but 3 to 6 months of expenses is a good rule of thumb. A cash reserve can be kept separate from other investment assets and invested in more liquid, less risky securities.

But what about for wealthy families, who may be less at risk of job loss or financial collapse? Yes, they should always have an emergency fund. It is good discipline and it also can provide flexibility and peace of mind.

In today’s situation of declining stock market values, an emergency fund could be used to make payments on home renovations, private equity commitments, or other major purchases without having to sell less-liquid securities at depressed values.

In calculating your future expenditures, do not forget about property taxes, estimated income taxes, multi-year charitable commitments, and regular living expenses. Even if you don’t require using your emergency funds, having them may enable you to accelerate or increase charitable giving, support family members in need, accelerate 2020 retirement contributions, or purchase investments at lower prices.