One of the most fundamental and basic parts of an investment plan is the emergency fund. However, it can also be one of the hardest answers to come up with since it’s an ambiguous concept. How do you know how much cash you will need for an unexpected event that may or may not happen? If you were to ask AI, it will most likely tell you 3-6 months’ worth of living expenses. And while I do consider that an okay starting point, your emergency fund amount should be more curated to your situation. Below are a few question you may want to ask yourself when trying to come up with an answer:

• How many sources of income do you have? If both you and your spouse both work, then 3 months’ worth of living expenses is all you may need. If you are the only working spouse, then 6 months may make more sense.
• If you lost your job tomorrow, how long will it take for you to find a new job with similar pay? If you work in tech, you may feel a sense of trepidation in your workplace as many positions are getting filled by AI. This would argue for a larger emergency fund. If you are in healthcare, and you know your experience is needed everywhere, you may feel more comfortable with leaving a smaller emergency fund.
• Are you retired? If so, one can easily argue your emergency fund should be $0. Since you are living off your fixed income and investments, you may already have set aside enough cash for upcoming expenses and would have already accounted for unusual costs in your financial planning. 
• What amount of cash do you need to hold onto to help you sleep better at night? There is value in having peace of mind. Your analysis may initially conclude that you only need $10k as an emergency fund, but you feel antsy not being able to see at least $25k of cash in your account. Yes, you could invest that $15k instead of leaving it in cash and potentially make more money, but if it allows you to sleep a little better I would argue that the cost of leaving that extra $15k in cash is worth every penny.

I want to note that if you find yourself in an emergency, and need additional funds, it does not mean your emergency fund is your only source to take from. The emergency fund is more of a buffer. Let’s say you unexpectedly have to replace the roof that will cost you $20k but you only have $15k for an emergency fund… what do you do? Take a deep breath, use the $15k emergency fund you do have and pay the rest with a credit card as a temporary bridge as you figure out how you plan to pay for the $5k difference. You may be able to just wait until your next payday to pay off that $5k bill, or you may need to sell some stock in a taxable account. Of course, you can also contact your financial advisor for their guidance. 😉

P.S. if you are young adult just starting out, you may not have the savings needed to keep 3–6 months’ worth of living expenses as an emergency AND THAT’S OKAY. Having as little as $1k as an emergency fund is still significantly better than $0.

Note: AI was not used for the creation, nor revision, of this blog post.