Fundamental to any discussion of personal finance is the topic of cash reserves, more commonly referred to as your Emergency Fund or EF for short. Your emergency fund is some measure of liquidity that stands between you and selling assets or taking on debt during one of life’s inevitable down moments. It’s not a question if life is going to serve you notice with bad news, but when it happens and what it’s going to cost you.

How Much: 

            Most personal finance folks are going to recommend an amount somewhere between 3 months and 12 months of your expenses and typically stress if you’re a high earner or later in your career you stretch for 6 months. If you’re younger or have easily replaceable income, 3 months is fine. If you’re looking to leave full time employment in the next few years, a full 12 months is likely more appropriate. Dave Ramsey advocates that folks starting his plan put together a $1,000 starter EF before paying down debt aggressively. While $1,000 won’t cover what it used to, it still keeps a surprising number of things from becoming a big deal.

            We also use months of expenses rather than a dollar amount since everyone’s expenses can vary widely. My full year of expenses in Tennessee wouldn’t float a West Coast tech worker very far given the large disparity in cost of living. We also don’t use your wage since during a crisis you won’t be paying income tax or saving the money you’re pulling from savings. Your expenses stand in for a tidy approximation of the size of emergency you’re going to have. There are practical limits to this, but it largely works.

            Most people automatically tend to think of job loss as the main driver for having cash reserves and that is a large part of the risk people need reserves for. Don’t forget that job loss is only one of the many bad things that can happen. In the twenty years I’ve had an emergency fund, I’ve never covered a job loss. I have purchased cross continent flights when my father passed, covered unexpected medical bills after a car crash, and covered major home and auto repairs that weren’t anticipated; but never a loss of income.

Where At:

            The fact it’s an emergency fund would indicate it needs to be somewhat liquid and easily accessible. Here is a list of possible places to stash your EF but you’ll notice a theme, they are all low risk, low yield places to hold cash. In the lingo of finance professionals, they are “Cash or Equivalents”. This isn’t an investment, it’s insurance against all the bad things you can make vanish by throwing money at them. 

Savings Account– there are no flies on the old-fashioned savings account. The only drawback is comingling this money with your normal savings to cover irregular expenses. A better idea is a High Yield version available at online banks and credit unions now that cash can actually yield something.

Money Market Account– available at every financial institution, the yields will vary considerably between them. They’re basically indistinguishable from a savings account in most regards. Some banks and credit unions will place limits on transaction frequency out of a money market, since this is for emergencies, that’s not a negative. 

T-Bills– In a brokerage account, a United States Treasury Bill (aka a T-Bill) is considered the safest and most liquid investment on earth. Rates tend to run a little higher than a savings or money market account. I like the 52-week bill for an emergency fund, but other short-term bills are available.

Cash– There is a good case to be made for having a portion of your EF in cash at the house. I think months of cash at home is a bad idea for a lot of reasons, but having a few hundred dollars isn’t such a bad idea when you consider the breadth of emergencies that can happen. I’d probably cap that at around $1000 for most folks. 

Where Not:

            You’ll notice a theme here too, a lot of these are actually other asset classes. You can’t just label them an “Emergency Fund” and call it a day. The things these lack are liquidity and availability. Some of them are pretty odd as well. 

Line of Credit– your emergency fund should be actual funds, not availability on a line of credit or a credit card. During a severe crisis, a bank may freeze your access to credit lines (ask the folks in 2008). Even then, the last thing you need to compound your troubles with is high interest debt.

Stocks– equities are the opposite of what an emergency fund should be. You don’t want to have to sell your stocks to cover a trip to the emergency room. You really don’t want to liquidate your stocks to cover a job loss. Your investments are what your EF protects, they aren’t your EF.

Home Equity/Car Equity– closely associated with “line of credit” and sometimes combined as a HELOC. The equity in your house is not liquid. In fact, it may be the most illiquid thing you own. Same thing with your car equity; tapping into it via a title loan or selling it fast will likely leave you with additional problems, not fewer.

Crypto/Silver Coins/OBIs– I’m still wondering why we’re talking about cryptocurrency in 2023, but here we are. Crypto is a bad idea for an emergency fund, the volatility is just one reason but at 50% in the last 12 months it’s not inconsequential. Silver and gold coins are “boomer crypto” when you get right down to it. A lot of folks think having a stash of silver or gold coins is going to provide them some form of inflation hedge or safe haven should the entire U.S. economy collapse. While that event is highly unlikely, buying a new roof out of your stash of Maple Leafs is likely going to be a bad deal for you. I’ve also included “OBIs” (aka Other Bad Ideas) because frankly, the list of stuff people consider their emergency fund is mind bogglingly bad and nearly limitless. I’ve heard of beanie babies, baseball cards, and grandma’s china all illogically considered “emergency reserves”. 

Bottom line, having a supply of readily available cash reserves for emergencies is prudent and you’ll be happy to have them sooner or later. Over the last few years, interest rates were so low that yields on cash were almost negligible and I kept my entire emergency fund in a money market account at my credit union. As rates have risen over the last year, I now keep a month of expenses in my money market at my credit union, 5 months in my brokerage account government money market fund, and 6 more months in my brokerage account as U.S. T-bills. I can access some of it immediately and the longest time I’ll need to wait is 48-72 hours to liquidate a T-bill and transfer the funds.

If you take away anything here, it should be this- Not having an emergency fund is an emergency.