How do I plan for Emergency?

An emergency fund (EF) is a cash reserve to cover unexpected financial needs, such as job loss, medical bills or home/auto repair. Common recommendation is that we should keep 3 months to 1 year of living expenses in highly liquid and stable financial accounts.

Emergency fund changes based on one’s life stage

There are many debates over EF, from such as “do we need it at all” to “how much do we need to keep in it”. There is no single answer because the requirement for it depends on our stage in life, financial status, job prospects, etc.

For those in 20s who started accumulating wealth in 401K, have student debt, and a high living expense vs. income, should have some funds in CD, saving or MMF accounts to cover weeks or several months expense.

For those in 40s who have a large mortgage and car loan, have most of investment in stocks, will need a bigger EF and a decent term life insurance. If a breadwinners loses income due to job loss or health issue, the family could get into high debt, and even worse, lose their home.

For those who retired, have a house paid off, decent income from retirement accounts and social security, will probably will not need an EF at all.

My Approach

I am in wealth accumulating stage and still have a mortgage, I need a decent EF to protect my family from life events.

I have been following this guideline and kept 6 months of living expenses in Ally Bank’s no-penalty CD. This CD is an excellent product however, I wanted to generate better returns from all my financial assets.

So, here’s how I will operate my EF:

  • Home equity line of credit - I opened $100,000 line of credit against my home so I can borrow whenever I need to at an interest rate lower than credit cards or personal loan.

  • Taxable accounts - I am going to grow some money in government bond funds which will return little better than CD while can be liquidated, highly likely, without a loss.