Have you heard of the 3-6 month rule? It’s the standard rule of thumb that you should keep 3-6 months worth of expenses on hand in cash in the event of emergencies.
My clients often ask me questions about this rule.
Is it still relevant?
Can it be more than six months?
Can it be less than three months?
Does it have to be cold, hard cash?
Like many things in personal finance, how much cash you keep on hand for emergencies is a matter of preference. Still, there are a couple of considerations of which I like to make my clients aware.
First, keeping a large amount of money in a savings account (or cash for that matter) can become a victim of inflation. With the average savings account yielding less than 1% interest and inflation currently over 2%, that money becomes less and less valuable every day.
Second, if you’re retired and saving withdrawals you’re making from your portfolio, that money is incurring tax. You’re going broke slowly.
Knowing these two considerations, I work with my clients to figure out the best cash reserve that works for them. Many times, it’s as simple as reminding them that money in securities like stocks can be used for emergencies. They’re easily liquidated, but they continue to collect returns much greater than inflation.
If you have questions about emergency funds, give my office a call today at 513-563-PLAN (7526) or book online here and schedule an appointment. We specialize in questions like these as well as helping you structure your assets in a way that ensures financial security.
Nikki Earley, CFP®