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Seeds of Inspiration #5: When You Have a Dedicated Emergency Fund, Unplanned Expenses Don't Have to Feel Like Emergencies

05/23/2021

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April 23, 2021

By Lars Olson, CFP®, ChSNC™, CPFA, CAP®, CRPS®
President, Wealth Advisor
Alluvial Private Wealth

covered bridge in marion

Whether we like it or not, life doesn’t always go as planned.  It seems we incur unexpected expenses arise at the most inopportune time.  For me, it was the hot water heater that went out on the heels of having just replaced the air conditioning system.  I didn’t enjoy paying for either.

We all run into these situations and unfortunately, you can’t buy insurance for every unforeseen situation.

For these times, an emergency fund can help cover the costs of unplanned expenses without disrupting your investment portfolio or having to borrowing funds.  We recommend that most investors have 3-6 months living expenses in a dedicated emergency fund.  For self-employed individuals, or those with highly variable incomes, we recommend 6-12 months in a dedicated emergency fund.

Without an emergency fund, you may have to rely on selling investments to cover the costs.  Unfortunately, depending on the timing, this could coincide with a market downturn.  If you do have to sell investments during a bear market, you may miss a market rebound – making your final cost significantly more expensive. 

Having to borrow funds to cover these expenses might also not be the best strategy as rates can fluctuate and there are times when access to credit is limited.  During the “Great Financial Crisis” of 2008, many banks reduced credit card limits and froze home equity lines of credit which prevented their customers from making additional draws.    

While you may not earn much interest on your dedicated emergency fund, the peace of mind you earn from it can be priceless and make unexpected expenses feel less like emergencies.

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